WPC 2BEJ Z Courier Y-#Xw P7><q*"xxxxWWxxxWWkkxxxBwgwgcccccc@XKKgg;;c\\\{I\waaIZQQOMXacccujygggpeyuVrQjQcccc3Qlc@uuccc;;ccccccccccccccccccccccnnnnnnnn#3#cccccj3cccccccccccccccccccccccccccccccrrrrnnnnnnnnnnXXccccccllccVVVVuuccaaaaccZZuZVVVV5*FVcc\QQ====pppfpfzQpGfQ\Q=3zQzffzQz\Qpp\p\\fQfQzppfppppp=\ffpQpppp==\\\\p\\\fffp=i\Q=Tgnj}}ccyyTjcc;T;TXFu",tB^ f ^6=X\\===\====\\\\\\\\\\==\nnzni=Qzfznn\fnnff===\\=\\Q\Q3\\33Q3\\\\FF3\QzQQFQ\Q\0\\\\\=\\\\\\\\\3n\n\n\n\n\zzQnQnQnQnQ=3=3=3=3z\\\\\\\\\fQn\\\\fQ\n\n\n\n\yQyQz\z\nnQn\n\nQ\\\\\\\>3\\\\=\\\\z\g3gBf\g3g3y\ny\z\\\znFnFn\\F\F\F\\gBg3f\\\\\\\zf\gFgFgF\f\z\\\f\f\n=\\===WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxN\\\=\UU\\\\\\@\\\\@==\\\33\\pp\\\b\\=\\@"\[\4\==p=\p\f\z\=\Q\iwUzpNm\QQ====pppfpfzQpGfQ\Q=3zQzffzQz\Qpp\p\\fQfQzppfppppp=\ffpQpppp==\\\\p\\\fffp=i\Q=Tgnj}}ccyyTjcc;T;TXFu2(\o zf €I<?xxx,?x6X@`7X@8wC;,WjjjjjjjIjjjjjjjAjjjjAjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjjj1jjj1jjj1jjj1jjjjjjjjjjjjjjZ\QZQbA\9_AmIjA1)gAbQQmAbIjAjZTIZII\AjAbZjQrZZZj\m1IjjjZAZZZZl11IIIIjmIIIjjjZ1TIA1ƄCӡggRXUuddOO{{{a{axmmjgurmmCmUOO/C/CuurrrrxxxrrrrF8^r",tB^ f ^6=U\\===\====\\\\\\\\\\==\zznGXznfzz===\\=\fQfQ@\f3=f3f\ffQG=f\\\Q\\\\0\\\\\=\\\\\\\\f3\\\\\QzQzQzQzQG3G3G3G3f\\\\ffff\\g\\\\nf\\\QQ\\}yQz\z\yQ\\\\\ffF3\f\\Gfi\\fy3yIz\zGz3ggf\\QQ\gFfGgFf\yIy>z\fgffgf\yQzQyQfz\ff\z\\}=\\===WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxN\\\=\NN\\\\\\@\\\\@==ii\00\\pp\\\sff=i\@"\i\4\==p=\\f\z\=\Q\i~XzpNm\\\====pzfpfzQzGzQQQG3QzffQz\Qpp\p\\zQQzpfpppzG\pQpppp==\\\\\\\p=p\Q=Tgnj}}ccyyTjcc;T;TXFu2 f Z^ f ",tB^ f ^6F_\\===\====\\\\\\\\\\==\zzzznF\znnzfnzznn===\\=\\Q\Q@\f33\3f\\\FF3fQz\QF\\\\0\\\\\=\\\\\\\\\3z\z\z\z\z\zQzQzQzQzQF3F3F3F3f\\\\ffffpQz\\\\nQ\n\y\z\y\yQyQz\z\uyQz\z\yQ\\\\\ffF3\\\\F\b\\z\n3nIn\n>n3ggf\\yFyFz\gFgFgFf\nFn3n\fgffgfzn\nFnFnF\n\ff\n\n\u=\\===WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxN\\\F\QQ\\\\\\=\\\\===bb\33\\pp\\\iii=b\="\s\4\==p=\z\f\z\=\Q\i~XzpNm\\\====zpzfpfzQzGpQQQG3zQzffQz\Qpp\p\\pQpQzpzfpppzzG\pppQpppp==\\\\z\\\pppp=p\Q=Tgnj}}ccyyTjcc;T;TXFu<?xxx,?x6X@`7X@8wC;,-ԍ See First Report and Order. Y In Phase I of this proceeding, we adopted several interim revisions to the LEC price cap plan pending adoption of longterm revisions to the plan. First, we increased the XFactor in the price cap formula. In the original plan, we had set the minimum XFactor at 3.3 percent and had given the LECs the  Y -option of using a higher XFactor of 4.3 percent. In the First Report and Order, we revised the minimum XFactor to 4.0 percent and increased the number of XFactor options from  Y}-two to three, with the optional XFactors set at 4.7 percent and 5.3 percent.\}*  TX-ԍ First Report and Order, paras. 21315.\ Second, we revised the rules governing sharing obligations and the lowend adjustments for the interim plan, including eliminating sharing and lowend adjustments for companies electing the 5.3  Y8-percent XFactor.]8  T-ԍ First Report and Order, paras. 22022. ] Third, we revised our exogenous cost rules relating to changes in  Y!-accounting rules.]!n  T@ -ԍ First Report and Order, paras. 29396. ] We also adopted a number of other revisions to the LEC price cap plan, including changing the lower pricing limits that apply to most of the service categories within"  0*(( "  Y-the traffic sensitive and trunking baskets from 5 percent to 10 percent,.  Ty-ԍ First Report and Order, paras. 26, 408, 411;  id. (determining that a 10 percent lower pricing band limit would provide the LECs with a reasonable additional amount of downward pricing flexibility, without risking predation or crosssubsidization).. and changing the  Y-lower pricing limits that apply to density pricing zones from 10 percent to 15 percent.X  T-ԍ First Report and Order, paras. 408, 411.X  Y- 14. Although our initial price cap rules already gave the LECs greater pricing flexibility than rateofreturn regulation, during the first four years of LEC price cap regulation, the Commission took a number of significant steps to increase the LECs' pricing  Yv-flexibility and ability to compete with new entrants. When we adopted the LEC Price Cap  Ya-Order, the LECs were required to offer all special and switched access services at rates that  YL-are geographically averaged for each study area.L  T-ԍ A study area is a geographical segment of a carrier's telephone operations. Generally, a study area corresponds to a carrier's entire service territory within a state. In the Special Access Expanded  Y7-Interconnection Order, the Commission permitted LECs with operational special access  Y" - expanded interconnection arrangements and at least one competitor in a study area to introduce zone density pricing for interstate highcapacity special access services (and other  Y -services found to be subject to competition) in that study area.7> 4  T-ԍ Expanded Interconnection with Local Telephone Company Facilities; Amendment of the Part  T-69 Allocation of General Support Facility Costs, 7 FCC Rcd 7369, 7454 n.411 (Special Access  T-Expanded Interconnection Order), vacated in part and remanded, Bell Atlantic Tel. Cos. v. FCC, 24 F.3d. 1441 (D.C. Cir. 1994); Expanded Interconnection with Local Telephone Company Facilities, 9  T=-FCC Rcd 5154, 5196 (1994) (Virtual Collocation Order).7 Zone density pricing is a system that permits the LECs gradually to reduce rates in geographic areas that are less costly to serve, and to increase rates, relatively speaking, in areas that are more costly to serve. Zone density pricing is implemented through special price cap service subcategories  Y-for each zone.|:  T-ԍ Transport Rate Structure and Pricing, 10 FCC Rcd 3030, 3042 (1994) (Transport Rate  T]-Structure and Pricing). The zone subcategories have an upper pricing band of 5 percent and a lower  T7-band which we recently increased from 10 percent to 15 percent. First Report and Order, para. 411. In the year during which a LEC introduces zone density pricing, the LEC must apply the same upper and lower bands to all of the zone subcategories for a given service, but the rate levels may diverge to the extent permitted by the upper and lower bands without the justifications that the price cap rules  T"-require for aboveband or belowband rates. Special Access Expanded Interconnection Order, 7 FCC  Ts#-Rcd at 7456, paras. 18183; Expanded Interconnection with Local Telephone Company Facilities;  TK$-Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, 8 FCC Rcd  T%%-7374, 743032 (1993) (Switched Transport Expanded Interconnection Order). In the Switched Transport Expanded Interconnection Order, the Commission  Y-permitted LECs with operational switched transport expanded interconnection arrangements" ~0*((;" in a study area to implement zone density pricing for interstate switched transport in that  Y-study area.  Tb-ԍ  Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 742532, aff'd, Virtual  T<-Collocation Order, 9 FCC Rcd at 5196.  Y-15. In the Special Access Expanded Interconnection Order, the Commission examined existing volume discounts and term discounts for special access services and found that they can be an effective approach to pricing that recognizes the efficiencies associated  Yx-with larger traffic volumes and the certainty of longerterm arrangements.bxD  Tm -ԍ Special Access Expanded Interconnection Order, 7 FCC Rcd at 7463. A volume discount  TG -would include, for example, lower perunit rates for service with the capacity of multiple DS3s, while  T -a term discount would include, for example, lower perunit rates when a customer commits to continue using the service over a multiyear period. In the Switched  Yc-Transport Expanded Interconnection Order, and more recently in the Virtual Collocation  YN-Order, the Commission allowed the LECs to offer volume and term discounts for switched transport services after a certain degree of competitive entry has occurred in the relevant  Y" -study area.& " n  TA-ԍ Specifically, we permitted LECs to implement volume and term discounts for switched transport rates in a study area when one of the following two conditions has been met: (1) 100 DS1equivalent switched crossconnects are operational in the Zone 1 offices in the study area; or (2) an average of 25 DS1equivalent switched crossconnects per Zone 1 office are operational. In study areas with no Zone 1 offices, volume and term discounts may be implemented once five DS1 Ty-equivalent switched crossconnects are operational in the study area. Switched Transport Expanded  TS-Interconnection Order, 8 FCC Rcd at 7435; Virtual Collocation Order, 9 FCC Rcd at 5202. A crossconnect is the cabling inside the LEC central office that connects the LEC network to the collocated  T-equipment dedicated to a competitive access provider using expanded interconnection.  See Section 69.121(a) of the Commission's Rules, 47 C.F.R.  69.121(a). A Zone 1 office is a LEC end office located in the zone with the highest traffic density characteristics pursuant to the zone density pricing policies set forth in the expanded interconnection orders.  Y -16. We have demonstrated, in acting upon waiver petitions proposed by Rochester Telephone Corp. and the NYNEX Telephone Companies, our willingness to act on waiver petitions that seek relief from existing Part 61 and Part 69 rules in order to implement proposals for promoting and responding to competition in cases where special circumstances" \0*((="  Y-are shown to be present.v  Ty- d(#G"Ѝ  See Rochester Telephone Corp. Petition for Waivers to Implement its Open Market Plan, 10 FCC  TS- d(#"Rcd 6776 (1995) (Rochester Telephone Corp. Order); NYNEX Universal Service Waiver Order, 10 FCC  T-- d(#!Rcd 7445, petitions for recon. pending. We also note a pending petition filed by Ameritech with the  d(#u!Commission regarding its plan to take certain measures that could facilitate competitive entry into the  d(#g local exchange market concurrently with its proposed unbundling of access facilities. Petition for  d(#"Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region  d(#!(filed Mar. 1, 1995); Update to Ameritech Customers First Waiver Request (filed Apr. 12, 1995). The  d(#V"Department of Justice has reviewed Ameritech's plan and has filed a motion, which the Commission has  d(# !supported, with the United States District Court for the District of Columbia to permit Ameritech to  T -provide interexchange service under certain conditions.  We have also promoted competition by permitting belowband  Y-rate changes, which cut transport prices by more than 70 percent, to take effect.  T -ԍ GTE Telephone Operating Companies, Investigation of Belowband Transport Rates,  Tx -Memorandum Opinion and Order, 10 FCC Rcd 1573 (1994)(GTE Belowband Investigation).  Y-17. In the initial Notice in CC Docket No. 941, we designated several issues as  Y-"Transition Issues."  T-ԍ Price Cap Performance Review for Local Exchange Carriers, 9 FCC Rcd 1687, 1705 (1994)  T-(Notice). We invited comment in the Notice on a variety of questions concerning the manner in which our current LEC price cap plan should be modified in order to adapt the system to the emergence of competition in local access and exchange  Yc-telecommunications markets. In the First Report and Order, although we acknowledged the emergence of competition in a number of segments of the LECs' markets, we generally found that the record before us was insufficient on these issues, and we decided to defer  Y -them until this Second Further Notice.g   T-ԍ First Report and Order, paras. 25, 36869, 40708, 418.g  X - R _III. GOALS AND REGULATORY PRINCIPLES ă  Y -18. A goal of our policies is to promote economic efficiency, which includes regulating prices so that they emulate the economic performance of competitive markets as closely as possible until actual competition arrives. This will ensure that the consumer welfare benefits approximate those of competitive markets, which should result in just and  Yh-_reasonable rates.h  T"-ԍ See Policy and Rules Concerning Rates for Dominant Carriers, Report and Order and Second  T#-Further Notice of Proposed Rulemaking, 4 FCC Rcd 2873, 2941 (1989) (AT&T Price Cap Order). We also seek to encourage the transition to competition wherever it may be feasible. LEC price cap regulation is designed to promote economic efficiency by easing restrictions on overall profits while setting price ceilings at reasonable levels. Under price": 0*(( " caps, the LECs have the incentive to become more efficient and innovative at the same time  Y-that customers benefit from lower rates.  Tb-ԍ See also First Report and Order, paras. 9394 (stating that, in considering revisions to the  T<-price cap plan, our goal would be to replicate and stimulate competitive outcomes); id. at para. 94 ("as a general corollary to the goal of seeking to both replicate and stimulate competitive outcomes, we will also prefer policies and programs that minimize distortion of competitive marketplace forces  T-in telecommunications"); id. at para. 406 (stating that, as we proceed to refine the price cap plan, it is our intention "that it will advance the goal of fostering an efficiently competitive local market").  Y-19. Price cap regulation also discourages discriminatory pricing by LECs in favor of their own vertically integrated operations and against customers that are CAPs, dependent on specific bottleneck facilities of LECs. Given that LECs are both competitors and suppliers of CAPs, and in certain markets of the IXCs, LECs have the opportunity to "price squeeze" their competitors by raising the price of the bottleneck services and lowering the price in  YH-competitive downstream markets.H H  T-ԍ See Local Exchange Carriers' Rates, Terms, and Conditions for Expanded Interconnection Through Virtual Collocation for Special Access and Switched Transport, Report and Order, 10 FCC  TQ-Rcd 6375, 6403 (1995)(Virtual Collocation Overhead Prescription Order).H In the price cap system, there are four basic safeguards for controlling a price squeeze. First, the price cap system places services with high crosselasticities of demand (competing services) in the same basket, while separating services  Y -without high crosselasticities of demand.!  T-ԍ Crosselasticity measures the changes in demand (or supply) of commodity X when the price  T-of commodity Y changes. A positive crosselasticity indicates that the commodities are substitutes.  Second, service subcategories/pricing bands prevent LECs from offsetting price decreases for competitive services with price increases for bottleneck services. Third, our rules governing the introduction of new services prevent LECs from charging anticompetitively high prices for new bottleneck services required by  Y -CAPs.k" r  T-ԍ  See discussion infra at Section IV.B.2.b.k Finally, an aggrieved party may file a complaint charging a violation of Section 202  Y-of the Communications Act.C#  TU-ԍ 47 U.S.C.  202. C  Yb-20. On the whole, the Commission's system has assured that interstate access prices charged by LECs generally decline in real, inflationadjusted terms. Moreover, by grouping similar services together in service baskets subject to their own price cap and (where relevant) service categories subject to pricing bands, the LEC price cap plan deters the LECs from recouping reductions in prices for competitive services with price increases for captive services.  Y- 21. Like all price regulation, the Commission's price cap system is an imperfect substitute for actual competition. LEC price cap regulation should continue only until" #0*(("  Y-competition emerges in the interstate access market. While the current price cap plan gives LECs greater incentives to operate efficiently and greater flexibility in setting rates, compared to rateofreturn regulation, it still imposes significant regulatory constraints upon carriers. Such constraints tend to become unnecessary or counterproductive as market forces  Y-become operational.  Yv- 22. Price cap regulation limits the exercise of market power by the monopoly local exchange carriers, who may remain protected today from competitive rivalry by endogenous  YH-and exogenous barriers to entry. Endogenous barriers to entry are barriers erected by the incumbent firms to discourage new entrants. Endogenous barriers in certain circumstances  Y -may include building substantial excess capacity,_$  T -ԍ Excess capacity serves as a threat to new entrants because the incumbent can control the  Tl -market price by increasing or decreasing its output. See, e.g., Avinash Dixit, A Model of Duopoly  TF -Suggesting a Theory of Entry Barriers, BELL J. ECON. 20 (1979)._ vertical integration,%;   T-ԍ Vertical integration makes entry more difficult because new entrants must either obtain permission from the incumbent to use essential facilities or enter the industry at the same level of  T-integration as the incumbent in order to achieve the same economies of scope as the incumbent.  To- Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization, Second Edition, Harper  TI-Collins College Publishers at 806 (1994).  and establishing  Y -conditions or agreements that limit a customer's ability to switch to alternative suppliers.&8   T-ԍ Assuming number portability were technologically feasible, a LEC's refusal to offer it might be an example of this type of barrier. The Commission is currently considering the feasibility and desirability of requiring telephone companies to implement local number portability in a separate proceeding. Telephone Number Portability, Notice of Proposed Rulemaking, CC Docket No. 95116, FCC 95284 (released July 13, 1995).  Y -Still another endogenous barrier that is of concern to this Commission is predatory pricing.*'>   T-ԍ See, e.g., Amendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, CC Docket No. 8979, 7 FCC Rcd  Tm-5235, 5237 (Second ONA Reconsideration Order), recon. denied, Amendments of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network  T-Architecture, CC Docket No. 8979, 10 FCC Rcd 1570 (1994) (Third ONA Reconsideration Order).* Predatory pricing is defined as "deliberately pricing below cost to drive out rivals and raising  Y -the price to the monopoly level after their exit."( #  T!-ԍ W. Kip Viscusi, John M. Vernon & Joseph E. Harrington, Jr., Economics of Regulation, D.C. Heath and Company at 213 (1992). Courts also have defined predatory pricing as pricing below  TE#-some relevant measure of cost in order to drive competitors from the market. See, e.g., Southern Pacific Communications Co. v. American Telephone and Telegraph Co., 740 F.2d 980, 100205  T$-(D.C. Cir. 1984), cert. denied. 470 U.S. 1005 (1985); citing Areeda & Turner, Predatory Pricing  T%-and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975); cited in Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 584 n.8 (1986). Previously, the Commission has concluded that requiring the price of a service to exceed the service's direct costs"''0*((2("  T-will prevent predatory pricing. Second ONA Reconsideration Order, 7 FCC Rcd at 5237 (para. 12);  Tj-(Third ONA Reconsideration Order, 10 FCC Rcd at 1571 (para. 5). We have defined cost for these purposes" D(0*((M "  Y-as average variable cost ("AVC").)D  T-ԍ AVC is defined as all nonfixed costs which would not be incurred if that service were not  T-offered. AT&T Price Cap Order at 3115. While actual instances of predatory pricing in the  Y-economy as a whole are generally considered to be rare,*d  TX-ԍ  See LEC Price Cap Order, 5 FCC Rcd at 6824 ("Predatory pricing, though often alleged, is  T2 -fairly uncommon, and proven cases are rare") (citing Areeda & D. Turner, Antitrust Law, para. 711 (1978)); R. Koller, The Myth of Predatory Pricing: An Empirical Study, 4 Antitrust Law & Econ. Rev. 105 (1971); J. Kwoka & L. White, The Antitrust Revolution (1989)). some experts believe that the telecommunications industry is susceptible to predatory pricing because its market structure and production characteristics are consistent with the conditions necessary for this pricing  Y-strategy.+t  T?-ԍ  Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy,  T-89 YALE L.J. 213, 21920 (1979). Joskow and Klevorick identify several structural factors that they argue are generally required for predatory pricing to occur. The most relevant of these are: (1) the predating firm must have monopoly power and (2) there must be entry barriers. In examining entry conditions, Joskow and Klevorick suggest looking at the amount of capital required by a new firm to enter a market at minimum efficient scale; whether the dominant firm has been successful in establishing a significant "brand preference" in the eyes of consumers; whether productive resources or assets can be transferred from one firm to another; whether entry occurs through "entry point" submarkets (in which case the dominant firm could prey only in the entry point markets); and the  T-perceptions of the risks of entry. Id. at 22731.  Others believe the substantial sunk costs required to enter the telecommunications industry provide protection against predatory pricing once the new entrant has constructed its plant, because if the new entrant is driven from the marketplace others can acquire these  Y_-facilities and continue to provide competition.V,_&  T6-ԍ Modern Industrial Organization at 385.V  Y1-23. Exogenous barriers to entry are those that are beyond the direct control of the incumbent firm and are due to either technological limitations or government regulation.  Y -Technological barriers are frequently associated with production economies.-   T| -ԍ Production economies may limit entry in several ways. First, large scale operations require substantial amounts of capital before entry into the industry can take place. Second, production economies limit the number of firms that a market can accommodate. In some cases, one or two firms can meet all market demand. Finally, the amount of "sunk" or unrecoverable investment may be proportional to total investment the larger the scale, the greater the amount of sunk costs. The risk that a firm in a market may be unable to recover substantial sunk costs discourages new entry.  T%-Modern Industrial Organization at 806. ļ Governmentimposed barriers typically consist of regulations that limit entry and exit or control rates. " z-0*(({ "Ԍ Y-24. Rate regulation may distort the prices access customers pay for services by  Y-holding them at levels that are either above or below their economic costs.v.  Tb-ԍ Economic costs (hereinafter "costs") reflect the current value of all the resources used to produce a product or service. The current values of resources are measured by their opportunity  T-cost, i.e., their best alternative use. See generally, Modern Industrial Organization at 56.v Prices set above the economic cost of providing service distort consumer decisionmaking. Above cost prices for interstate access services, for example, likely result in higher interstate retail toll prices and cause toll customers at the margin to consume other goods and services rather than to increase their use of interstate long distance services. Such prices also cause highvolume and even moderatevolume business customers to substitute dedicated facilities, which may be the local exchange carrier's special access facilities, or those of an alternative provider, even where the use of such facilities is not economically efficient, if the price of dedicated access is less than an above cost price that the customer would pay for services that use switched  Y -access.,/:   T-ԍ Switched access prices that impose excessive charges on large users create an incentive for them to substitute dedicated access for switched access even if the cost the carrier incurs to provide the dedicated access is greater than the cost to the LEC of providing the switched access. Such inefficiencies are magnified in areas where there are numerous high volume toll users coupled with  TE-the availability of competing services. NYNEX Universal Service Waiver Order, 10 FCC Rcd 7445.,  Y -25. Prices above costs also attract inefficient service providers. Prices establish important decisionmaking signals for both potential (and existing) suppliers of communications services as they do for users of these services. If the prices that LECs are permitted to charge are held above the competitive level by our regulations, inefficient entry may be encouraged. Furthermore, such entry may occur in the expectation that existing price relationships will be maintained. Permitting rates to reflect costs will limit new entry  Yb-to efficient providers.90b  T/-ԍ Id.9  Y4- 26. Rates that are held below costs are equally undesirable because they also can distort decisionmaking by potential competitors concerning entry and investment in the market. Rates in lowdensity markets that are held below cost by regulation can create an illusion of underinvestment in communication facilities in those areas. This is because the communications users will demand more at these prices than producers are willing to offer. In addition, potential efficient entrants may be deterred by the appearance that incumbents' costs, as reflected in artificially depressed prices, are lower than their own. The existence of  Y-a bona fide shortage of telephone services cannot be established until prices rise to cost. Only when prices equal or exceed costs will potential entrants be able to evaluate properly the financial benefits of entering these markets. Permitting rates to rise to cost would facilitate efficient, competitive entry. "9 00*((="Ԍ27. The institutional structure of the industry itself may operate in combination with our access charge rate structure to contribute to suboptimal pricing. This is because the enduser generally selects the local service provider, to the extent there is any selection to be made, even though the IXC is responsible for compensating the local service provider for much of the cost of access. Furthermore, an IXC terminating a call has no choice regarding the local service provider whose facilities will be used for that purpose. This dichotomy between the service provider selection process and the compensation process may inhibit competition and delay efficient pricing for access services. Thus, it is possible that competition in the access market may develop at a different pace and in a different manner than competition in the provision of local telephone service.  Y -28. In the First Report and Order, we recognized that competition in the access markets is starting to emerge. As previously stated, this Second Further Notice is a response to this development. We consider issues relating to clarifying and simplifying the introduction of services, giving the price cap LECs certain additional pricing flexibility, and revising the structure of service baskets and categories under the price cap plan. We believe these proposals will achieve the goals we have articulated herein without risking competitive harm. In this context, we define competitive harm in terms of the ability of a LEC to prevent prices paid by access customers from moving toward their efficient economic cost or to reduce the quality or range of services provided to access customers or to impose unreasonable endogenous barriers to entry. Because interstate access services are a critical input in the provision of interstate interexchange service, we also define competitive harm to include LEC actions that could affect adversely competition in the interexchange market, which would collaterally harm long distance users, such as by preventing long distance prices paid by end users from moving toward their efficient economic cost, or by reducing the quality or range of services provided to long distance users. 29. To meet our objectives of promoting competition, encouraging marketbased pricing, encouraging efficiency and innovation, and permitting us to regulate efficiently and unintrusively to the benefit of consumers, we offer the following guidelines. First, we generally propose to limit the relaxation of regulation to that which will not cause competitive harm as defined herein. We expect the reforms we propose to implement within the price cap plan to benefit consumers regardless of the actual level of competition. If the potential for harm is evident, however, the grant of pricing flexibilities and other relief would be postponed until specific competitive standards are met. Pricing flexibilities and other relief that have less potential for creating harm would face a lower competitive threshold than those that are potentially more harmful. Second, we expect the pricing flexibilities that we propose here will result primarily in rate reductions. Downward pricing flexibility will permit LECs to respond to competition and rationalize rates that otherwise are inefficiently inflated. Third, we propose to eliminate price cap regulations that are no longer necessary to prevent anticompetitive behavior or promote LEC innovation or efficiency whenever doing so would not disadvantage consumers. In addition to the relief and pricing flexibility we specifically propose, we also request comment on a number of other possible forms of regulatory relief and price cap modifications."%'00*((P("Ԍ30. We also ask for comment in Section V. of this Second Further Notice on the extent to which services should be removed from price cap regulation or subject to "streamlined" regulation, the conditions under which this should be permitted, and the best way to proceed in granting such regulatory relief. In Section VI., we ask under what conditions LECs should be deemed "nondominant" and relieved from all but the minimum statutory requirements. 31. There are a number of issues which we consider outside the scope of this Second Further Notice. First, we anticipate seeking comment on a number of specific issues regarding our longterm price cap plan in an upcoming further notice. In particular, that notice will request comment on the following: (a) the XFactor, including calculation of the XFactor, the number of XFactors to be included in the price cap plan, and whether the XFactor should be reviewed and modified periodically or set on a permanent basis; (b) the sharing and lowend adjustment mechanisms; (c) the common line formula; and (d) the exogenous cost rules. We do seek comment in Section VII.A. of this Second Further Notice, however, on whether the competition faced by a LEC should influence its XFactor or sharing obligations. Second, we will not consider making comprehensive or substantial  Yy-revisions to Part 69 of the Commission's Rules,V1y  T-ԍ See First Report and Order, para. 416.V although we consider in Section IV.B. modifying Part 69 to simplify the procedures for introducing new switched access services. Finally, some changes to the price cap rules proposed here might place pressure on rates for which we do not propose pricing flexibility because such flexibility may impact the broader access charge rate structure. For example, we do not propose here that carriers be permitted to change the way they compute their enduser common line charges. We believe consideration of such changes would be more appropriate in a separate proceeding on access charge reform which we intend to initiate in the near future.  Y-I  IV. REVISIONS TO THE LEC PRICE CAP PLAN ă  X-  X}-A.General  Yf- 32. As explained previously, we propose a framework of LEC price cap regulation with three gradations generally reflecting increasing degrees of competition for a LEC's services. In this section, we seek comment on issues related to the first gradation of our Ienvisioned framework: modifying the price cap system itself. We solicit comment on the second and third gradations, streamlined regulation and nondominant treatment, later in this Notice.  33. In this section, we seek comment on a number of possible changes to our LEC price cap rules. These fall into three basic categories: (1) simplifying treatment of new""j10*((#"  Y-services and innovative tariff offerings, including alternative pricing plans ("APPs");2  Ty-ԍ As discussed infra at Section IV.B.2.c., we seek comment on whether to define APPs as services that are selfselected optional discounted rate plans for a service that currently exists. (2) granting price cap LECs certain additional pricing flexibility, including the offering of APPs such as volume and term discounts and eliminating the lower SBI limits; and (3) changing the price cap service basket and category structure. Each modification of the price cap plan is described in Part B. !34. We propose that the changes we describe herein generally be effective without regard to the current level of competition. Because we believe these proposals will facilitate more efficient pricing by LECs and remove incentives for inefficient entry, we tentatively conclude that they need not be conditioned on a competitive showing. Alternatively, these changes could be made effective only upon a showing that barriers to competition have been removed. In Part C, we discuss several potential criteria that could be used to determine whether markets are open to competition to an extent that would justify affording the LECs the proposed regulatory relief if we conclude that a proposal should not be implemented without consideration of current market conditions. In those situations in which a commenter recommends requiring some demonstration that barriers to competition have been removed prior to making a change or granting some specific relief or pricing flexibility, the commenter should explain why current market conditions require that relief or flexibility be conditioned upon such a showing. The commenters should also discuss the evidence that should be required, how the Commission could verify such demonstration, and the causal nexus between the recommended showing and the relief at issue. For example, what threat to competition would be engendered by allowing the proposed change without a demonstration that no barriers to competition exist? How would the recommended competitive test alleviate this threat? Conversely, commenters supporting our proposal should explain why affording LECs a certain type of relief or pricing flexibility before they have demonstrated some level of actual or potential competition would not create an unreasonable risk to competition or consumers. "35. Adopting competitive standards requires a definition of competitive markets to which the standards apply. In Part D, we propose definitions of geographic and product markets for purposes of measuring competition and defining the area in which we would grant any relief that we decide to make contingent on a finding of a competitive market.  Y - Market definitions are also necessary for streamlining and nondominance determinations. We propose to use the same market definitions in Section V (Streamlined Regulation) and Section VI (Nondominance).  #36. Comments on the price cap modifications, the competitive "triggers," and the market definitions should address, among other things, the expected impacts on the prices, innovation, shortterm and longterm growth of competition, and efficient investment in and use of telecommunications services and facilities. In addition to commenting on the"#B20*(($" individual rule changes we propose below, we request commenters to consider the implications of adopting various of these rule changes in combination with one another. In other words, we seek comment on the likely cumulative effect of these proposed changes in  Y-addition to the impact of particular proposals in terms of their potential effects with respect to our regulatory goals. To the extent that states have implemented price caps and other flexible regulatory structures, we would be interested in receiving comments concerning the experiences in those states as they relate to the issues in this Second Further Notice.  X_- dJ:\PRICECAP\INTRO.SHD dJ:\PRICECAP\BASELINE.SHD #&m PE37D&P#X01Í ÍX01Í Í#Xw PE37v  T -ԍ LEC Price Cap Order, 5 FCC Rcd at 6825 (para. 319). d We adopted this procedure in  Ya-part to encourage LECs to develop innovative new services.c?a`  Tr-ԍ LEC Price Cap Order, 5 FCC Rcd at 6825 (para. 318).c We also found that excluding new services from price cap regulation for a period of time is necessary to enable LECs to develop historical data, so that the new service can be incorporated into the LEC's price cap indexes based on actual data, rather than the 12month projections included in its initial cost  Y -support.c@   T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6825 (para. 319).c The use of historical data helps ensure that the service will properly be incorporated into the plan in a manner that protects the public interest.  Y -*43. The tariff filing and other requirements currently applicable to restructured service offerings differ from those applied to new services. Restructured service offerings must be filed on 45 days' notice and no cost showing is required. Rather, LECs are required to show only that the rates for the restructured service fall within their existing PCI, and the  Yd-actual price indexes (APIs) and SBIs must be recalculated.Ad  T-ԍ Section 61.49(f) of the Commission's Rules, 47 C.F.R.  61.49(f); LEC Price Cap Order, 5 FCC Rcd at 6826 (para. 325). Further, restructured services are incorporated into the applicable price cap basket immediately upon effectiveness of the tariff.  Y-+44. In the comments submitted in response to the Phase I Notice in this proceeding, several LECs argued that the new service rules are unreasonably timeconsuming and  Y-burdensome, and may impede the development and introduction of new services.\B  T$-ԍ See First Report and Order, paras. 398402. \ We  Y-decided not to consider revising the new service rules in the First Report and Order, so that we could address this issue in conjunction with issues raised by other revisions to the price"B0*(("  Y-cap plan to be made in response to the emergence of competition.SC  Ty-ԍ First Report and Order, para. 415. S We seek to eliminate unreasonable restrictions or undue delays that our current rules may impose on LECs' ability to introduce new offerings. We also seek to make our procedures governing the introduction of new service offerings more efficient and certain.  Y-,45. We propose that LECs be allowed to introduce certain new services on shorter notice and with less cost support than our current rules require for new services. We propose that new services be divided into two categories, known as "Track 1" and "Track 2"  YH-services. Track 1 new services would remain subject to current notice, cost support and other requirements. Track 2 new services would be subject to reduced notice and cost support requirements. -46. As a preliminary issue, we must determine the new services that should remain subject to Track 1 treatment. We see at least two general options for making this determination. A first option would be to treat all new services in a relevant market as Track 1, until the LEC has made some kind of demonstration that its competitive circumstances warrant the relaxed Track 2 regulatory relief. (Issues related to these "triggers" are discussed in Section IV.C., below.) A second option would be to establish a test to distinguish between new services that warrant higher scrutiny from those that warrant a lower level of scrutiny, based on the nature of the services themselves. Those services requiring less scrutiny because they raise no competitive implications (based on a standard such as we propose below) would be afforded Track 2 treatment regardless of the level of competition the LEC actually faces for those or other services. We invite interested parties to comment on both approaches. In particular, we seek comment on the approach that would enable us to focus our attention on new services that need closer review, without becoming administratively burdensome. .47. If we adopt the second definitional approach and base the definitions of Track 1 and Track 2 on the nature of the new services themselves, we would need to establish those definitions. As a starting point, we would propose to include as Track 1 services any services that the Commission requires LECs to offer. An example of a service that we  Y7-require LECs to offer is expanded interconnectionD7j  TR -ԍ See, e.g., Virtual Collocation Order, 9 FCC Rcd 5154. We required all Tier 1 LECs, except members of National Exchange Carrier Association (NECA) pools, to provide expanded interconnection service. Puerto Rico Telephone Company is the only Tier 1 carrier participating in  T"-NECA pools. Special Access Expanded Interconnection Order, 7 FCC Rcd at 7398 (para. 57). Tier 1 LECs are those earning $100 million or more per year from regulated telecommunication operations. Section 32.11 of the Commission's Rules, 47 C.F.R.  32.11. In the provision of expanded interconnection, LECs permit competitors and access customers to terminate their own basic transmission facilities at LEC central offices and to interconnect with LEC special access or switched  T'-transport facilities. See Sections 64.1401(d), (e), and (f) of the Commission's Rules, 47 C.F.R. "'C0*(('" 64.1401(d), (e), (f). Tier 1 LECs are required to offer expanded interconnection through "virtual  Th-collocation," which would permit an interconnector to designate or specify equipment needed to terminate basic transmission facilities to be located within or upon the LEC's central offices and dedicated to that interconnector's use, unless the LEC and the interconnector agree to a physical collocation arrangement. Under physical collocation, an interconnector would be permitted to place  T-its own equipment needed to terminate basic transmission facilities in the LEC's central office. See Section 64.1401(c) of the Commission's Rules, 47 C.F.R.  64.1401(c).  (although we note that expanded"7zD0*((" interconnection is currently subject to special pricing requirements in addition to the basic  Y-new services test rules, and we do not propose to modify those requirements).Ez  T -ԍ Virtual Collocation Order, 9 FCC Rcd at 518591; Virtual Collocation Overhead Prescription  T -Order. A second possible category of services we might consider as Track 1 is services essential to a LEC's competitors. Expanded interconnection is also an example of a service that we would consider essential to a LEC's competitors. We consider expanded interconnection essential to a LEC's competitors because it enables those competitors to offer transmission segments  Yv-that can substitute for the previously bundled segments offered by the LECs.gFv  T-ԍ Virtual Collocation Order, 9 FCC Rcd at 5159 (para. 9).g This facilitates competitive entry into the markets for special access and switched transport services in an environment where LECs control essential facilities. A possible alternative to this "essential services" test might be a "close substitutes" test. Under this alternative, Track 1 services would include services that are not "close substitutes" for an existing service,  Y -within the meaning of the Second ONA Reconsideration Order.aG  TL-ԍ Second ONA Reconsideration Order, 7 FCC Rcd 5235.a A new service would be considered a close substitute for an existing service or a group of existing services when a carrier can show that it reasonably expects customers of those existing services to migrate to  Y -the new service.xH :  T-ԍ Second ONA Reconsideration Order, 7 FCC Rcd at 5237 (para. 11) and n.18.x The rationale for this possible approach is that the absence of a close substitute to which a LEC customer could turn warrants more careful regulatory review of the new service to ensure that other providers can effectively compete with the LEC. We solicit comment on these definitions, and invite parties to suggest other possible definitions for Track 1 services that would help us identify offerings that may have a significant effect  YM-on the competitive marketplace we desire to see established. It is important that any definition be easy to administer. Thus, commenters should explain, for example, how any proposed distinctions in services would provide a "bright line" test for distinguishing Track 1 from Track 2 services, and how any proposals would reduce the regulatory burden for all concerned. /48. If we adopt the definitional approach and distinguish between Track 1 and Track 2 based on the nature of the service itself, then we propose to delegate to the Common Carrier Bureau the authority to determine whether a particular new service should be"H0*((" classified as Track 1 or Track 2 under definitions established by the Commission. For example, price cap LECs seeking Track 2 treatment for a new service could submit a petition  Y-prior to filing its tariff explaining why Track 2 treatment is warranted. The petition would be deemed granted on the 10th day after it is filed unless the Bureau notifies the carrier that its request is denied on or before the 10th day. Parties opposed to the classification of a new service as Track 2 would have the opportunity to object within that framework. We invite parties to comment on this proposal, and to recommend other possible procedures that would enable us to determine whether a new service warrants Track 1 or Track 2 treatment without creating excessive administrative burdens for the Commission or the industry. 049. We propose retaining the existing notice and cost support requirements for Track  Y -1 new services.I:  T| -ԍ Sections 61.49(g) and 61.58(c)(5) of the Commission's Rules, 47 C.F.R.  61.49(g) and 69.58(c). Of course, the Commission can specify different notice and cost support, as well as other special requirements such as overhead loading specifications, for any service it deems of special  T-concern. See, e.g., Video Dialtone Order, 10 FCC Rcd 244; Virtual Collocation Order, 9 FCC Rcd at 5189. For Track 2 new services, we propose reducing the notice requirement to 14 days, but invite comment on whether a longer or shorter period would be preferable and, if so, why. We also propose with respect to Track 2 services to require carriers to show that the new service rates will recover the direct costs of providing the service as we currently do for new services, and to eliminate all other currently required cost support requirements for these services, except if the Commission has prescribed special, specific cost and other filing requirements relating to the type of service concerned. If the Commission has adopted such special cost and other rules, as it has, for example, with respect to expanded interconnection and video dialtone, then these specific requirements would be followed in lieu of the rules we are proposing. We believe that under the relaxed rules we are proposing, the direct cost showing and the definition of Track 2 services will be adequate to ensure that the offering of such services will not have anticompetitive effects.  Y-150. Unlike the new services test, the filing support requirements for restructures do not seem to raise the same potential for chilling innovation or hindering responsiveness to the marketplace. The filing support requirements for restructured service offerings are minimal. Thus, we propose to retain our current cost support filing requirements for restructured services and invite comment on this proposal. Parties that support changing these requirements should suggest specific modifications.  Y7-251. It may not be necessary to retain the current 45day notice requirement for restructures. We originally adopted a 45day notice requirement rather than 14 days because we were concerned that it would not be possible to address issues of unreasonable rate levels  Y-or discriminatory pricing in 14 days.cJ  Tm&-ԍ LEC Price Cap Order, 5 FCC Rcd at 6826 (para. 324).c As the competitive circumstances faced by LECs increase, unreasonably high restructured rates become less likely, and thus a notice period of"lJ0*(( " less than 45 days would appear to be appropriate. One option would be to establish a uniform notice period for all restructured tariff filings. A second option would be to establish two notice periods, one for restructured service rates that would be higher than the replaced, "old" service rates, and another notice period for restructured service rates that would be lower than the replaced service rates. For example, we could require 15 days' notice for rate "increases," and 7 days' notice for rate "decreases." Parties should comment on the practicality of these suggestions, including how long any revised notice periods should be. 352. We further propose to revise the definition of new services to exclude APPs. As discussed more fully below, we propose defining APPs as services that permit customers to "selfselect" an optional discounted rate for a service which continues to be offered to customers. Otherwise, we propose retaining the current definition of new service: any service that expands the range of service offerings available to the consumer. Our rationale in excluding APPs from the definition of new services is to allow such optional discounted offerings of existing services to avoid the more thorough regulatory review given to new services. We believe LEC customers would be protected because the original offering was subject to the normal regulatory review and customers still have that service choice available to them. 453. We seek comment on the regulatory treatment of new services and restructured services under the price cap plan, including comment on the following questions:  Y-X Issue 1a:  Should we relax the regulatory requirements relating to new services for some or all new services? Will there be any anticompetitive or other negative effects as a result of such modifications to the plan? If a relaxed treatment is appropriate for only certain new services, how should we distinguish between the services eligible for the simplified treatment and those which are not? What are some examples of the services that would fall into each category? How would this distinction be administered? What cost showings, notice, and other regulatory requirements are necessary with respect to the various types of new services to provide the appropriate level of regulatory oversight without hindering the efficient introduction of new services?  Y!-X Issue 1b: Should we modify the definition of new services to exclude APPs or otherwise?   Yj$-X Issue 1c: Should we modify the definition of restructured services? What, if any, changes should be made with respect to the treatment of restructured services? "&'J0*((P("Ԍ X-v` ` c. Alternative Pricing Plans (# 554. We seek comment on whether to allow optional discounted offerings of services that have been, and continue to be, provided (APPs), establish a new category of tariff filing for such services and subject the introduction of such services to relaxed regulatory treatment. In vaddition to seeking comment on this proposal, we seek comment on certain other related issues. 655. By way of background, currently there are no special rules governing the provision of APPs by price cap LECs. If a LEC wishes to introduce an optional discounted plan for a service it currently provides, the plan would be treated as a new service under current rules. We currently permit one type of switched access service that would fall within our proposed definition of APP, namely, volume and term discounts on certain transport services when LECs can show a certain level of demand for their expanded interconnection  Y -services. K  T7-ԍ Volume and term discounts are permitted for special access services without any competitive  T-showing or Part 69 filing. See Special Access Expanded Interconnection Order, 7 FCC Rcd at 745865.  In the Switched Transport Expanded Interconnection Order, we permitted LECs to offer reasonable volume and term discounts on entrance facilities and interoffice facilities and tandemswitched transport, including pricing that reflects speeds greater than DS3. We noted that as a general matter such discounts should be permitted if they are justified by underlying costs, and are not otherwise unlawful, because they encourage efficiency and full  YM-competition.LM  T-ԍ Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 743233 (para. 115). While we found that term discounts were not controversial,HMM  T-ԍ Id. at 7434 (para. 116).H some small  Y6-IXCs were concerned that volume discounts would benefit primarily AT&T.HN6^  TE-ԍ Id. at 7434 (para. 117).H We decided to permit volume and term discounts in certain geographic markets where a certain level of expanded interconnection exists, so that LECs would be able to respond to discount plans  Y-offered by other access providers.3O  T-ԍ Id.3 Specifically, we permitted LECs to offer volume and term discounts in a study area once they were able to show either that (1) 100 DS1equivalent switched transport crossconnects have been taken by interconnectors in the zone 1 offices in that study area; or (2) an average of 25 DS1equivalent switched transport cross Y-connects per zone 1 office in the study area have been taken by interconnectors.P  T$-ԍ Id. at 743435 (para. 118). (See discussion of densitybased "zones" in SectionIV.D.3.,  T%-supra). In study areas without any zone 1 offices, we permitted volume and term discounts after five DS1"~ P0*(("  Y-equivalent crossconnects have been taken in the study area.:Q  Ty-ԍ Id. n.264.: These volume and term discounts are filed under the "new services" test.  Y-756. When we adopted the Switched Transport Expanded Interconnection Order, the problems with respect to headroom arising out of volume and term discount plans or other new services that would fall within our proposed definition of APPs had not yet been brought to our attention. "Headroom" refers to the difference between the PCI and the API for any particular basket of price cap services. We have focused on those issues more recently,  YJ-however, in the AT&T notice of proposed rulemaking concerning APPs.RJj  Te -ԍ See Policy and Rules Concerning Rates for Dominant Carriers, Revisions to Price Cap Rules  T? -for AT&T, 10 FCC Rcd 7854 (1995) (AT&T APP Notice). Specifically, in AT&T's case, optional discount offerings enable it to offer discounts to some residential service ratepayers, while increasing its basic schedule rates for residential service, without  Y -any loss of revenues.TS   T-ԍ AT&T APP Notice, 10 FCC Rcd at 7860.T Under current practice, the headroom on which AT&T predicates its basic schedule increases is based on AT&T's forecasted demand estimates for its promotional offerings. Because these offerings are incorporated into the price cap indexes based on the weighted average demand of the services in the basket, customers of AT&T's basic schedule services may be charged more than they would have been otherwise when AT&T's forecasted demand exceeds actual demand. There is currently no requirement in our rules that AT&T "true up" its demand estimates, nor any requirement to refund charges based on  Yd-overestimated demand.`Td  T-ԍ AT&T APP Notice. 10 FCC Rcd at 7860.`  Y6-857. The AT&T APP Notice seeks comment on our proposals for revising AT&T's price cap plan to account for APPs. AT&T would be allowed to file APPs initially outside  Y -of price caps on 14 days' notice and without cost support, provided that the APPs are  Y-scheduled to expire automatically no later than 90 days after the initial effective date.`U*  T-ԍ AT&T APP Notice, 10 FCC Rcd at 7865.` Because the APPs would be kept outside of price caps during this period, AT&T would not  Y-receive headroom "credit" for the APP. AT&T would be permitted to incorporate the APP into its price cap indexes upon the conclusion of this 90day period, as opposed to the six to eighteen month base period for new services. At the end of the 90day period, AT&T would be allowed to convert the APP to a permanent offering under price caps, subject to the  Yi-provisions of Section 61.49 of the Commission's rules.gVi  T%-ԍ 47 C.F.R.  61.49. See AT&T APP Notice at 786566. g The estimated annual revenue contribution of APPs would be computed by extrapolating actual demand data collected"Rn V0*((z"  Y-during the 90day period.TW  Ty-ԍ AT&T APP Notice, 10 FCC Rcd at 7864.T AT&T also would be required to file quarterly reports updating the estimated demand amounts during the first 12 months after the APP is incorporated into  Y-price caps.TXj  T-ԍ AT&T APP Notice, 10 FCC Rcd at 7866.T  Y-958. AT&T offers APPs to end users on a national basis. The market for access services in which LECs participate is limited geographically relative to the market for  Yv-interexchange services,Yv   T3 -ԍ We discuss issues related to the relevant geographic market for access services in Section IV.D. of this Notice. and the access customers are generally a relatively small number of interexchange carriers and large endusers in any given market as opposed to the millions of customers for interexchange services. In addition to the differences between AT&T interexchange services and LEC exchange access services, there are also differences among the interstate access services that LECs offer. As a result, our proposals for APPs for AT&T may not be appropriate with respect to LECs, or at least with respect to certain LEC service baskets or services. For example, the proposed rules for AT&T APPs are designed, in part, to address the effects of the headroom created by AT&T's optional service offerings. To the extent that LEC APPs are not likely to generate substantial headroom, because of the LEC price cap basket structure or otherwise, extending the proposed AT&T rules to the LECs may not be appropriate. In addition, we note that LECs currently are required to offer interstate switched access services in accordance with a prescribed rate structure. LECs might seek to offer APPs for switched access services that would lead IXCs to shift their interstate traffic from the current offerings to APPs. We seek comment on whether there is the potential for competitive harm in allowing the LECs to offer APPs that is not present in the interexchange market. There may be other reasons for concluding that it would not be in the public interest to apply to the LECs the rules we have proposed for AT&T.  Y- :59. We invite parties to comment on whether we should allow price cap LECs regulatory flexibility to offer other APPs in addition to volume and term discounts currently allowed so long as the LEC continues to offer the standard service offering of which the APP is an optional discounted plan. For this purpose, we would define APPs as services that permit customers to "selfselect" an optional discounted rate plan for a service that currently exists and propose considering APPs as a service classification which is distinct from either  YN-new services or restructures.jZN  T#-ԍ See AT&T APP Notice, 10 FCC Rcd at 7862.j In addition, we invite comment on whether we should allow  Y7-LEC APPs to be introduced pursuant to the same rules we have proposed for AT&T, i.e., on fourteen days' notice and without cost support for up to 90 days. We would allow LECs to convert APPs to permanent offerings under price caps following the submission of tariff revisions complying with our new services test, on not less than 45 days' notice and"&Z0*(( " accompanied by cost support as required under Section 61.49 of our rules. In addition to these proposals, we also seek comment on whether we should adopt other rules for APPs  Y-modeled on those we proposed in the AT&T APP Notice.[[  TK-ԍ See AT&T APP Notice, 10 FCC Rcd at 786266.[ Commenters advocating different approaches to the price cap treatment of LEC APPs should explain the advantages of their proposals. If we do not permit LECs generally to introduce APPs, we invite parties to comment on whether we nevertheless should permit LECs to offer volume and term discounts for switched access services in addition to those currently permitted and, if so, what rules should govern such offerings. We particularly invite proponents of other approaches to discuss how their proposals strike a proper balance between our interest in promoting expeditious and efficient introduction of offerings and the need to ensure appropriate oversight to protect against anticompetitive practices.  Y - ;60. Allowing the LECs to provide APPs and subjecting them to this relaxed review may encourage a greater variety of offering for consumers, result in at least certain ratepayers and consumers paying lower rates and allow the LECs the opportunity to better respond to the marketplace. Although the review of APPs would be relaxed, because the nondiscounted offering remains available to customers, there may be little likelihood of harm to customers. We request comment on the subject of APPs, in particular on the  Yd-following questions:  Y6-X Issue 2a:  Should we allow LECs to file APPs in addition to the volume and term discounts currently permitted? Under what terms and conditions? How should APPs be defined? Would the  introduction of APPs cause any anticompetitive effects? If we permit LECs to offer APPs, what notice, cost support, and other requirements should be applied to those tariff filings? Should the rules be different depending on the particular LEC service basket or services involved and, if so, how? How and when should APPs be integrated into the price cap plan?  YQ-X Issue 2b: If we do not generally permit LECs to introduce APPs, should we nevertheless permit volume and term discounts for switched access services other than those currently permitted? If so, should we condition such offerings on a showing of competitive  Y-presence similar to the conditions adopted in the Switched  Y-Transport Expanded Interconnection Order or on the other measures of competition discussed in this Second Further Notice in the geographic areas where such competition exists? ""j[0*((#"Ԍ X- v` ` d. Individual Case Basis Tariffs <61. We have recently seen an increase in the number of individual case basis (ICB) tariff filings. Although ICB tariff filings have some characteristics of contract tariffs, they are generally intended to be precursors to new service offerings. Because this Second Further vNotice raises definitional and other regulatory questions relating to the introduction of services, we believe it is advisable to consider ICBs here as well. That will permit us to develop a consistent regulatory framework that allows price cap LECs appropriate flexibility in light of existing market conditions, while protecting against anticompetitive, unreasonably discriminatory or other negative consequences. Accordingly, we make several proposals to further define the treatment of ICB filings. =62. In the past, we have occasionally permitted LECs to file ICB rates. ICB pricing is the practice of developing a price for a particular service or facility in response to each  Y -customer request for the service or facility.\  T7-ԍ Local Exchange Carriers' Individual Case Basis DS3 Service Offerings, CC Docket No. 88 T-136, 4 FCC Rcd 8634, 8641 (para. 63) (1989) (ICB Order). ICB pricing is usually used for services that the carrier has no experience in providing and that are unlike any existing service, so that the carrier has no basis on which to develop generally available rates. We have also permitted ICB pricing for special construction offerings, which are onetime, nonrecurring charges for construction activity on a customer's premises. Each special construction offering can have unique cost characteristics, and thus it may not be reasonable to develop averaged rates for these offerings. >63. We have excluded ICB offerings from price cap regulation, because they are  Y-offered on a contracttype basis rather than a generally available basis.c]B  T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6810 (para. 193).c We have stated that price cap treatment would have little effect on onetime special construction activity, and so  Y-such offerings should be excluded from price cap regulation.3^  TV-ԍ Id.3 We have also concluded that ICB tariffs would continue to be appropriate for services featuring a new technology for which little demand exists, but stated that those services should be treated as new services  Y|-when the LEC develops generally available averaged rates for them.3_|  T!-ԍ Id.3  YN-?64. We established general requirements for ICB rates in the ECA Tariff Order and  Y9-the ICB Order.`9(  T&-ԍ Investigation of Access and Divestiture Related Tariffs, CC Docket No. 831145, 97 FCC 2d  T&-1082, 1143 (1984) (ECA Tariff Order); ICB Order. We found that ICB rates were acceptable as an interim measure for certain"9 `0*((L" services, until the carrier has gained sufficient experience in providing the service to develop  Y-generally available averaged rates.a  Tb-ԍ ICB Order, 4 FCC Rcd at 864142 (paras. 6364), quoting ECA Tariff Order, 97 FCC 2d at 1143. Specifically, we found that ICB rates would be  Y-acceptable only for those services which the carrier has no experience providing, i.e., it must be a service that the carrier has not offered previously, and it must not be "like" any other  Y-previously offered service, within the meaning of Section 202 of the Communications Act.vbB  T-ԍ ICB Order, 4 FCC Rcd at 8642 (para. 66). Services are not "like" within the meaning of Section 202 if they differ in any material functional respect. Ad Hoc Telecommunications Users  TK -Committee v. FCC, 680 F.2d 790, 795-96 (D.C. Cir. 1980) (Ad Hoc); Western Union v. FCC, 568  T% -F.2d 1012, 1018 (2d Cir. 1977), cert. denied, 436 U.S. 944 (1978) (Western Union); American  T -Broadcasting Co. v. FCC, 663 F.2d 133 (D.C. Cir. 1980) (ABC)); American Trucking Ass'n v.  T -FCC, 377 F.2d 121 (D.C. Cir. 1966), cert. denied, 386 U.S. 943 (1967) (American Trucking);  T -American Tel. & Tel. Co. (Hi/Lo), 55 FCC 2d 224, 230 (1975), aff'd mem. sub nom. Commodity News Services, Inc. v. FCC, 561 F.2d 1021 (D.C. Cir. 1977); MCI Communications Corp. v. FCC,  Te-917 F.2d 30 (D.C. Cir. 1990) (MCI v. FCC). Customer perception is a "critical concept" and a  T?-"linchpin" of the functional equivalency test. Ad Hoc, 680 F.2d at 796.v The ICB rate must be used only as an interim measure, and the carrier must develop  Yx-averaged rates within a reasonable period of time.Mcx  T-ԍ ICB Order, 4 FCC Rcd at 8642.M Although we did not state specifically what would be a reasonable period of time in which to develop generally available rates, we did find that five years was an unreasonably long period of time to provide a service on an  Y3-ICB basis.Xd3,  T-ԍ ICB Order, 4 FCC Rcd at 8642 (para. 69).X  Y -@65. We specifically propose requiring a LEC seeking to offer a common carrier service, except for special construction, at ICB rates to show in the supporting documentation that the service is so unlike any existing service that the LEC would have no reasonable basis to develop generally available rates. Furthermore, we believe that when a carrier has more than two customers for a common carrier service, or has provided the service for six months or more, it has or should have sufficient experience with the service to develop averaged rates. At that time, we propose that the offering may not be continued as an ICB but must be treated as a new service subject to the new service requirements. We propose that the cost support requirements of Section 61.38, applicable to nonprice cap carriers, should apply  Y6-to the tariff filings establishing ICB rates.e86  T#-ԍ In the past, the Common Carrier Bureau has rejected ICB tariffs because the LEC failed to comply with Section 61.38. BellSouth Telephone Companies, Revisions to Tariff F.C.C. No. 4, 6 FCC Rcd 373 (Com. Car. Bur. 1991); Southwestern Bell Telephone Co., Revisions to Tariff F.C.C. No. 68, 5 FCC Rcd 5980 (Com. Car. Bur. 1990). In pertinent part, Section 61.38 requires: (1) a study containing a projection of costs for a representative 12 month period, and (2) estimates of the"'d0*(('" effects of the service on the carrier's traffic and revenues for that representative 12 month period. Section 61.38(b)(2) of the Commission's Rules, 47 C.F.R.  61.38(b)(2). We also propose to continue to exclude ICB"6 @e0*(("  Y-tariffs from price cap regulation.cf@  T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6810 (para. 193).c Finally, we propose to continue to permit LECs to offer special construction on an ICB basis, without requiring averaged rates. We believe that these proposals will allow price cap LECs the flexibility they need to respond promptly to certain specialized needs of customers, while maintaining regulatory review necessary to assure that ICBs are not used in an anticompetitive, unreasonably discriminatory or other manner which is inconsistent with the public interest. Accordingly, we seek comment on our proposals and more generally on the following issues:  YH-X Issue 3:  Under what conditions, if any, should we permit price cap carriers to establish ICB rates? What showing would enable us to determine that the carrier cannot reasonably be expected to establish generally available averaged rates at the time the common carrier service is introduced? How long should we permit those rates to remain in effect before we require generally available averaged rates? What cost support requirements should apply when the carrier files ICB tariffs, and when the LEC files tariffs establishing generally available averaged rates?  XL-v 3.` ` Part 69 Waiver Process (#`  A66. We propose modifications to the current procedures that price cap LECs must follow in order to establish new rate elements for a new switched access service. We make this proposal in order to encourage LECs to introduce new services and to allow them to do vso more expeditiously. B67. By way of background, the Commission promulgated rules in the early 1980s to  Y-establish a system of tariffed charges for interstate access services provided by LECs.Dg@  T'-ԍ MTS and WATS Market Structure, CC Docket No. 7872, Phase I, Third Report and Order,  T-93 FCC 2d 241 (1983), modified on recon., 97 FCC 2d 682 (1983), modified on further recon., 97  T -FCC 2d 834 (1984), aff'd in principal part and remanded in part, National Association of Regulatory  T!-Utility Commissioners v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227  T"-(1985), modified on further recon., 102 FCC 2d 849 (1985).D The  Y}-access charge rules, which are found in Part 69 of the Commission's Rules,<h}  T%-ԍ 47 C.F.R. Part 69.< prescribe the  Yf-service definitions and rate structures for interstate access services provided by the LECs.aif  T'-ԍ All LECs are required to comply with the Part 69 rules.a "f!* i0*((]" The Part 69 rules prescribe the offering of two basic forms of interstate access services  Y-"switched access" and "special access."Xj`  Tb-ԍ Switched access services utilize the local exchange switch to interconnect transmission facilities and route traffic. With special access or leased line service, traffic is carried on facilities dedicated to the use of a particular customer, which could be an interexchange carrier or a business user.X For the switched access services, the Part 69 rules prescribe the elements that must be used in the access tariffs. Part 69 does not prescribe a rate structure for special access services. C68. A LEC that seeks to introduce a rate element for interstate switched access services that is not provided under the Part 69 rate structure rules may request that the  Y_-Commission grant the LEC a waiver of the rules pursuant to Section 1.3.k_  T -ԍ A LEC seeking to introduce a rate element not prescribed under the Part 69 rate structure rules for interstate access services may also request that the Commission initiate a proceeding to change our rules. In the waiver request, the LEC specifies the exact rate elements intended for the service. Under Section  Y1-1.3, we are authorized to grant a waiver of our rules "if good cause therefor is shown."=l1@  T"-ԍ 47 C.F.R.  1.3.= As interpreted by the courts, this requires that a petitioner demonstrate that "special circumstances warrant a deviation from the general rule and such deviation will serve the  Y -public interest."m  T}-ԍ Northeast Cellular Telephone Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990); WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969).  Y -D69. LECs have argued that many new services and technologies do not readily fit the existing Part 69 rate structure requirements, and that the process for obtaining a waiver of the rules to introduce a new rate element is costly, timeconsuming, and poses a significant  Yy- impediment to the development and introduction of new services.ynyX  T-ԍ See First Report and Order, para. 398, and pleadings cited therein.y In the First Report and  Yd-Order, we indicated that we were not convinced that this proceeding was the appropriate forum in which to conduct a review of the Commission's Part 69 rules and did not anticipate  Y8-that this Second Further Notice would include a review of the Part 69 rules.Ao8  T!-ԍ Id. at para. 416.A We continue to believe that a comprehensive review of our Part 69 rules should appropriately be pursued in a separate proceeding; however, we also believe that the benefits of the changes to the treatment of new services proposed above might be diminished if we did not make some immediate changes to the Part 69 waiver process. We are concerned that we not retain any undue restrictions which might hinder LECs' ability to respond to the marketplace or to introduce new services. ""o0*(("Ԍ Y-ԙE70. We propose to modify Part 69 so that price cap LECs would not be required to seek a waiver of Part 69 each time they want to establish new rate elements for a new switched access service, thus relaxing the regulatory process relating to the introduction of such new services. Our intention is to facilitate the expeditious introduction of new switched access services while insuring that there is adequate protection against anticompetitive actions. Specifically, we propose to eliminate the need for waiver of the Part 69 rules. We further propose to modify Part 69 to permit the introduction of new services based on a public interest finding. Once the Commission determines that the public interest would be served by one price cap LEC establishing new rate elements for a new switched access service, we propose to permit others to introduce new services consistent with that ruling in an expedited fashion. These proposals would apply to the offering of an APP which establishes new rate elements for an existing service, as well as the introduction of a new service. F71. First, we propose amending Part 69 to allow a price cap LEC to file a petition proposing to establish new rate elements for a new switched access service. Rather than meeting the standard required for a waiver of our rules, the LEC would be required to show that the offering would serve the public interest. We seek comment on specific criteria by which to evaluate such a public interest showing. Second, we propose that once the Commission grants the first LEC's petition to establish a new rate element, other price cap LECs would be allowed to submit a certification letter stating an intention to provide the same service and to establish the same rate elements. The certification would include a description of the proposed service and the rate elements to be utilized so that we can analyze the proposed offering. No waiver of our rules would be required, and Part 69  Y-requirements would be deemed satisfied within a short period of time (e.g., 10 days), unless the Bureau concludes within that time that the subsequent LEC's service offering raises issues that were not considered in the original order granting the petition to establish the new rate elements. If the Bureau does not act within the prescribed period of time, authority to establish the rate elements in question would be deemed granted. In the event the Bureau denies certification, we propose requiring the LEC to file a traditional Part 69 waiver petition. G72. Third, we propose permitting the first LEC proposing the new switched access service to provide less specificity in the description of its proposed rate structure than we have required previously. Rather than requiring the LEC to request and be granted authority to establish specific rate elements for a service, we propose permitting it to describe the service to be offered and to describe alternative ways in which the rate elements may be established for the service. The Bureau order granting the petition would specify which types of rate elements would be acceptable for the proposed service. H73. Fourth, if we divide new services into Track 1 and Track 2 categories as discussed previously, we propose to amend Part 69 to relax further the procedures for establishing new rate elements for services that would be eligible for Track 2 new service treatment. Specifically, we would propose permitting a price cap LEC desiring Track 2"%'#o0*((P(" treatment for a new service and needing grant of its petition to establish new rate elements for the service (again this would be the first LEC proposing a particular new service) to seek both a determination of Track 2 status and grant of its petition in the same filing and to review the filing under the same expedited procedures that we propose for petitions which seek only a determination of Track 2 status. By consolidating the procedures for obtaining Track 2 treatment and grant of the petition, we believe that we would facilitate the introduction of new services and ease administrative burdens faced by price cap LECs without significant risks of anticompetitive consequences. I74. We seek comment on our proposal, and invite commenters to make other proposals on this subject. Commenters suggesting other approaches should explain how their approaches would still provide an appropriate level of regulatory protection and the ease in which they could be administered.  Y -  Y -X Issue 4a:  Should we eliminate the requirement for, or simplify the process of, obtaining a waiver of Part 69 for new switched access services and, if so, how? What standard should we use in determining whether to grant a petition proposing to establish new rate elements for a switched access service? Would there be any anticompetitive or other negative effects from modifying the current system?  Y-X Issue 4b: How should any new procedures with respect to Part 69 waivers be coordinated with the process for determining whether a new service is a Track 1 or Track 2 service as defined in the previous subsection herein if those concepts are adopted?   X- v4.XElimination of Lower Service Band Index Limits and Other Pricing Flexibilities (# J75. We propose the elimination of the lower service band limits in the price cap plan. We believe this change will result in more efficient pricing, enhance competition, and will not adversely affect ratepayers. We also invite commenters to propose other measures vwe could take which could promote costbased pricing, eliminate pricing restrictions, and enhance competition. K76. By way of background, under the price cap plan, a separate PCI applies to each of the four service baskets and separate upper and lower SBI limits apply to each of the categories and subcategories within the traffic sensitive and trunking baskets. Service baskets and bands are methods of restricting pricing flexibility that carriers would otherwise have if the Commission had adopted a theoretically pure price cap system. In a pure price cap system, all services offered by a carrier would be subject to a single price cap, and carriers"j$$o0*((%" would have unlimited ability to migrate individual prices up or down so long as aggregate  Y-prices remained below the cap.cp  Tb-ԍ LEC Price Cap Order, 5 FCC Rcd at 6810 (para. 198).c  Y-L77. In the AT&T Price Cap Order, we established the price cap plan for AT&T and sought comment on and proposed the LEC price cap plan. We noted there that the proposed LEC price cap plan restricted pricing flexibility more than the baskets and bands we established for AT&T. These greater restrictions were imposed because LEC services were  Ya-less competitive than interexchange services. We initially proposed setting the pricing bands for service categories in the traffic sensitive and special access (now trunking) baskets at plus  Y3-or minus 5 percent, to balance the need for regulatory control and rate flexibility.Iq3j  TN -ԍ  AT&T Price Cap Order, 4 FCC Rcd at 3239 (para. 758). In the LEC Price Cap Order, we adopted 5 percent as the upper and lower bounds for the service categories in the special access  T-basket. LEC Price Cap Order, 5 FCC Rcd at 681314 (paras. 22426).I Central to the Commission's decision to impose the lower band limits was its concern that LECs  Y -would set prices in an anticompetitive manner.dr   Tt-ԍ  AT&T Price Cap Order, 4 FCC Rcd at 3239 (para. 758).d In that decision, however, we sought further comment on whether the lower bands regulation could be relaxed and whether these  Y -pricing limits should be set at the same level as AT&T's bands.ds `  T-ԍ  AT&T Price Cap Order, 4 FCC Rcd at 3239 (para. 758).d  Y -M78. In the LEC Price Cap Order, we established upper and lower limits for service categories in the traffic sensitive and special access service baskets to create a "nosuspend" band within which LECs may move prices up or down five percent on short notice, and with a presumption of lawfulness. Rates that departed from the band were subject to a more  YO-challenging tariff review process.btO  T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6811 (para 204).b No service category banding requirements were imposed  Y8-on the common line basket or on the interexchange basket.gu8  T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6811 (paras. 20506).g  Y -N79. Subsequently, we reevaluated the service categories and rate bands in a number  Y-of orders with the objective of reducing unneeded regulation. For example, in the Switched  Y-Transport Expanded Interconnection Order, we adopted zone density pricing for switched transport services and expanded the pricing band within each zone to 5 percent up and 10 percent down annually relative to the price cap index applicable to the traffic sensitive service basket without triggering any additional cost justification or advance notice requirements. The weighted average of all rates in the same service category, however, must conform to the pricing bands for that service category. To achieve this goal, we"m%F u0*((" created two subindexes in each density zone, one for tandemswitched transport rates and the other for direct trunked transport, entrance facilities, and dedicated signalling transport. Transport services in the aggregate were banded at plus 5 and minus 5 percent at the service category level for directtrunked transport and entrance facilities or at plus 2 percent and minus 5 percent at the service category level for tandemswitched transport. In addition, LECs were permitted to price within plus 5 percent and minus 10 percent ranges in each  Yv-density zone.vv  T-ԍ Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 743132 (paras. 11112).  YH-O80. We again examined the service band issue in the Second Transport Order.rwHj  Tc -ԍ Transport Second Report and Order, 9 FCC Rcd 615, 629 (para. 32). r Although the LECs urged us to expand the bands, especially in the presence of competition, we elected to make no changes at that time. We continued to believe that there was insufficient competition to protect the public interest and that the service category bands constrained the LECs' ability to offset rate reductions in some service categories with rate increases in other categories. Because of those concerns, we adopted additional constraints on the LECs' ability to change rate relationships in the trunking basket. Specifically, we placed flatrated DS3, DS1 and tandemswitched transport in separate service categories or  Y-subcategories and applied separate zone bands to each category.nx   TO-ԍ Transport Second Report and Order at 625, 629 (paras. 21, 32).n  Yd-P81. In the First Report and Order in this proceeding, we considered once again the issue of expanding the service bands and concluded that enlarging the lower service band limits would not greatly increase the risk of successful predation. This conclusion was based in part on the growth in competition that the industry has experienced since the adoption of expanded interconnection for special access and switched transport and in part on the substantial benefits that consumers would realize from lower prices. We noted that the Commission has other mechanisms at its disposal to inhibit predatory pricing, such as the continuing requirement that belowband rate reductions be accompanied by cost support, and the formal complaint process established by Section 208 of the Communications Act. Finally, we noted that permitting LECs greater downward pricing flexibility removes incentives for inefficient entry. As a first step, we modified the five percent lower band limits that apply to most service categories within the traffic sensitive and trunking baskets by expanding them to 10 percent. In addition, we increased the lower pricing band limits that apply to density pricing zones from 10 percent to 15 percent to ensure that LECs continue to have the opportunity to move their rate levels in particular geographic zones  Y -toward cost.Ry   Tl%-ԍ First Report and Order, para. 411.R "&Py0*(( "Ԍ Y-Q82. Although the changes that we imposed in the First Report and Order were limited in scope, we indicated a willingness to make additional changes in the price cap rules  Y-as competition developed.Rz  TM-ԍ First Report and Order, para. 412.R We pointed out our belief that downward pricing flexibility is in the public interest and stated that we would issue another notice to investigate the  Y-conditions that might warrant further relaxation of the lower bands.R{j  T-ԍ First Report and Order, para. 408.R We have also permitted substantial downward pricing flexibility by allowing belowband rates to take  Yx-effect.^|x   T5 -ԍ GTE Belowband Investigation, 10 FCC Rcd 1573.^ R83. Eliminating the lower service band limits for all service categories in both the traffic sensitive and trunking baskets would increase LEC pricing flexibility and allow price cap LECs to move prices closer to cost. We expect that it might immediately result in lower rates for certain competitive access services. The current price cap plan may inhibit a LEC from lowering its prices to cost in certain instances, because of the administrative burden and  Y -length of time it can take for belowband filings to be approved.=}   T6-ԍ See id.= In those instances, inefficient entry may be encouraged and new or existing LEC competitors have no incentive to price their services at cost. Instead, they will price their service just enough below the LEC price to attract customers. If the lower service band limit were eliminated, the LECs and their competitors will be able to engage in true competition and bring prices down toward cost immediately. The lower service band limits were designed to prevent LECs from lowering their prices below cost in order to thwart competition and then raising them after competitors have been driven from the market. Because they restrict the LECs' ability to raise prices after they have been lowered, the upper service band limit, at five percent above the LEC's new lower rate, and the price cap itself would remain as disincentives to predatory pricing if the lower service band limits were to be eliminated. Additional restrictions on raising rates after rate reductions could further serve as a disincentive to predatory pricing in the absence of lower service band limits. In addition, below cost or predatory prices could still be challenged through a petition against a tariff filing or the formal complaint process. The petitioning or complaining party bears the burden of demonstrating that the challenged prices are below cost, while currently the LEC bears the burden of demonstrating that belowband rate reductions are not below cost. Thus, elimination of lower service bands shifts the burden of proof from the LEC to the petitioner. S84. As we stated, one of the primary reasons for our proposing to eliminate the lower service band limits is to allow price cap LECs to move prices more quickly towards costs in situations where they may be currently inhibited from doing so. As discussed above, moving prices towards economic costs is a key goal as we consider modifications to the price"'P}0*(( !" cap system. Since the establishment of the price cap system, we have made certain changes which may promote this goal, including modifying the principle that prices must be geographically averaged for each study area to allow zone density pricing for certain services. For some services, we have permitted increased downward pricing flexibility in some geographic areas, or zones, to reflect cost differences due to differences in traffic  Y-density.~  T-ԍ Special Access Expanded Interconnection Order; Switched Transport Expanded Interconnection  R-Order.ī For example, we allowed NYNEX to deaverage the residual interconnection charge (RIC) in the New York City metropolitan area and to establish different RICs in each  Y_-density pricing zone.<_B  TR -ԍ The conditions we placed on this waiver are: (1) NYNEX may not raise any interconnection charge to offset a decrease in another interconnection charge; (2) NYNEX may not, once it lowers an interconnection charge, raise that charge later; and (3) NYNEX may not lower the RIC below a floor  T -equal to the rate element's relative share of tandem switching costs. NYNEX Universal Service  T-Waiver Order, 10 FCC Rcd 7445, paras. 5455. We invite parties to propose additional pricing flexibilities that would promote the movement of prices towards costs generally. We invite parties specifically to discuss the relationship between downward pricing flexibility and varying costs, demand and other characteristics of different geographic markets such as density zones. Parties should explain how a particular proposal would promote our goals, why it would not have negative competitive effects, and discuss whether this is the appropriate forum for considering the issue. They should also discuss whether the proposal should be allowed regardless of the current level of competition or only upon a showing that certain competitive conditions exists. wT85. We solicit comment on the following questions:  YK-X Issue 5a:  Should we further expand or eliminate the lower service band index limits for all access services? Does there remain a danger of predatory pricing or other anticompetitive practices? Would wthis additional downward pricing flexibility harm any LEC customers? Would it harm competition?  Y-X Issue 5b: Should we place additional limits on the ability of a LEC that decreases prices pursuant to this flexibility to subsequently increase those prices in order to preclude the potential for anticompetitive pricing strategies?  YP-X Issue 5c: Are there any other pricing flexibilities which we should adopt to promote costbased pricing? How would the proposal promote our objectives? Would added flexibilities cause competitive harm? What is the relationship between downward pricing flexibility and the varying cost, demand, and other"(F0*((" characteristics of different geographic markets? Should additional pricing flexibilities be considered in this proceeding or in another context?  Y- X (#  X- 4 5.` ` Revision of Baskets  Yv-U86. The price cap plan divides services among four service baskets, each subject to  Y_-its own price cap.W_  T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6811.W The four service baskets are common line, traffic sensitive, trunking  YH-and interexchange.5Hj  Tc -ԍ Section 61.42(d) of the Commission's Rules, 47 C.F.R.  61.42(d). We have also solicited  T; -comment on whether to establish a separate price cap basket for video dialtone services. Further  T -Notice, 10 FCC Rcd at 314749.5 Within the traffic sensitive and trunking baskets, services are grouped  Y1-into4 separate service categories.n1  T-ԍ Section 61.42(e) of the Commission's Rules, 47 C.F.R.  61.42(e).n Price changes within service categories are constrained by  Y -the upper and lower service band indexes.i ^  T)-ԍ Section 61.47 of the Commission's Rules, 47 C.F.R.  61.47.i The assignment of services to price cap baskets  Y -and bands is intended to replicate the effect of competition.J   T-ԍ Notice, 9 FCC Rcd at 1694.J Services with common characteristics, for example, similar levels of competition, are grouped within a single basket. A carrier is prevented from subsidizing price decreases for services in one basket with increases in another, because changes in prices within one basket do not affect  Y -computation of the API and PCI in other baskets.3  T-ԍ Id.3  Yy-V87. In the LEC Price Cap Order, we divided services among baskets according to the  Yd-thenexisting interstate access structure set forth in Part 69 of the Commission's Rules.adB  TW-Ѝ LEC Price Cap Order, 5 FCC Rcd at 6788.a In  YM-the Second Transport Order, we realigned the division of services among baskets by combining transport and special access services into the newlycreated trunking basket. The Commission decided to "mov[e] transport services out of the traffic sensitive basket and into a basket with special access services . . . [to] prevent the LECs from offsetting rate reductions for transport services subject to competition with rate increases for switching and  Y-other traffic sensitive services, which [were] subject to much less competition" at that time.d  Tq%-ԍ Transport Second Report and Order, 9 FCC Rcd at 622.d ")0*(("Ԍ Y-W88. In the initial Notice, we sought comment on whether we should revise the basket  Y-structure both as a baseline and as a transition issue.S  Td-ԍ Notice, 9 FCC Rcd at 1695, 170506.S In its comments, USTA proposed four baskets organized to allow for the grouping of rates for equivalent functions: transport,  Y-switching, "public policy,"j  T-ԍ USTA's proposed public policy basket would include the special access surcharge, end user common line charge, and the carrier common line charge (or any substitute recovery mechanism). USTA Comments at 68. and "other."y  T( -ԍ USTA Comments at 6672; see also First Report and Order, para. 380.y Most LECs generally supported USTA's  Y-proposal.V\  T -ԍ See First Report and Order, para. 381.V NYNEX noted that with the recent formation of the trunking basket, the Commission's current baskets adequately group services by functionality. It suggested retaining them with minor revisions and renaming them with the names suggested by  Ya-USTA.Ba  T-ԍ NYNEX Comments at 2327.B Pac Bell supported USTA's proposal and stated that ultimately there should be only two baskets: one basket for services subject to explicit and implicit subsidies, and the other for services that are subject to high elasticities of supply and demand, but are not fully competitive. Services offered in competitive markets would be removed from price cap  Y -regulation altogether.C  TT-ԍ Pac Bell Comments at 102.C Other commenters supported maintaining the current composition of  Y -baskets.V >  T-ԍ See First Report and Order, para. 382.V  Y -X89. In the First Report and Order, we noted that the rate of development of competition is likely to differ for each of the price cap baskets, and that it will remain important to avoid grouping services with different levels of competition in the same  Y}-basket.E}  T-ԍ Id., para. 414.E Because the baskets were established to prevent LECs from raising prices for noncompetitive services to recoup lost revenues due to price decreases for competitive services, we concluded that modifications to price cap baskets and bands may be necessary as  Y8-competition develops in local telephone markets.38  Tk#-ԍ Id.3 The record in Phase I of Docket No. 941 did not provide sufficient information on the state of competition to support making any  Y -immediate changes in the composition of baskets.3 $  T&-ԍ Id.3" *0*(("ԌY90. We seek comment on whether the development of competition for particular services requires adjustment to the current basket structure and whether and how the basket structure should be changed as competition continues to emerge. For example, we seek comment on the kinds of changes in market circumstances that might be identified now as triggers for future revisions to the basket structure. We seek comment on whether we should plan to make changes to the basket structure on an industrywide basis, in this or future rulemakings, or on a casebycase basis as competitive circumstances change for individual price cap LECs. Commenters should also address under what circumstances, if any, multiple baskets could be eliminated. For example, if sharing were eliminated, thereby diminishing LEC incentives to manipulate their rate of return, and entry barriers come down, including unbundling of the local loop, would there be a continuing need for multiple baskets? Z91. In addition, parties should comment on the need to create one or more new baskets to accommodate LEC entry into new services that may not be subject to competition.  Y - For example, the expanded interconnection virtual and physical collocation tariffs have until now been held out of price caps. We seek comment on whether there are circumstances, now or in the future, that would justify bringing these services into price caps. `[92. We solicit comment on this issue, particularly the following questions:  Y-X Issue 6a:  Would any revisions to the price cap baskets serve our goals in this proceeding? If so, explain how they would serve those goals. Would there be any adverse effects on endusers or competition? `  Y-X Issue 6b:  Under what circumstances should the price cap baskets be revised? Can revisions be planned to take place automatically on achievement of particular milestones or must they be done on an individual basis or after a periodic review? If they can be planned to take place on achievement of particular milestones, what should those milestones be? Should any individual review of the basket structure be done as part of a rulemaking proceeding? Are there any other procedures that would be appropriate?  Y -X Issue 6c:  As competition develops at different rates for different services within different geographic markets, should different basket structures be established for a particular LEC or within a particular study area or even within a smaller geographic area?  Xk$- "k$+0*((%"Ԍ X-v6.` ` Consolidation of Service Categories (#`  X-  Y- \93. Consolidation of service categories would allow a LEC more pricing flexibility. We created separate service categories in the price cap plan to group together services with high crosselasticities of demand. This limits the LECs' ability to offset rate decreases for  Y-vmore competitive services with rate increases for less competitive services.  T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6811 (para. 203); BNA Order, 8 FCC Rcd at 4483 (para. 24). If services have high cross elasticities and are competitive with one another, then they can be included in the same service category without creating an incentive for the LECs to lower the price of one service and raise the price of another.  Y -]94. We invite commenters to suggest service category consolidations that they believe would be appropriate and would not result in competitive harm. For example,  Y -USTA, in an ex parte statement filed in Phase I of the performance review proceeding,  Y -advocated eliminating the DS1 and DS3 subcategories.f B  T-ԍ Ex Parte Letter from USTA, Attachment 2 at 2 (filed Jan. 18, 1995)(January 18 Letter); see  T-also First Report and Order, para. 386. We stated in the First Report and Order that we believed that it would be premature on the record that we had before us at that time to modify the structure of  TT-the LEC price cap baskets. First Report and Order, para. 412. Comments should address whether the services proposed to be grouped in the same category share similar demand characteristics, and whether there is any reason to anticipate that LECs would adjust their prices in a way that would harm competition or otherwise not be in the public interest. We note, however, that if we eliminate lower service band index limits as proposed earlier in this Second Further Notice, consolidation of service categories would not provide any additional downward pricing flexibility, but instead would provide additional upward pricing flexibility by creating "headroom" for services that are in the same service category with services for which the LECs have lowered their rates.  Y-^95. Combining service categories would entail adjusting the relevant SBIs. For example, when we combined the transport services with special access services to create the trunking basket, we based the upper and lower bands on the weighted average of the preexisting upper and lower bands for special access services and the five percent upper and  Y-lower bands for the flatrated transport services.wp  T!-ԍ Transport Second Report and Order, 9 FCC Rcd at 631632 (paras. 3536).w  Ye- XIssue 7a: Would any service category consolidations serve our goals in this proceeding? If so, explain how they would serve those goals. Would there be any adverse effects on endusers or competition?  Y -" , 0*(("Ԍ Y-X Issue 7b:  Under what circumstances can consolidation of service categories occur?   Y-X Issue 7c:  If service categories are combined, how should the relevant SBIs and the SBI upper and lower limits be adjusted?   Xx- _7. Further Notice of Proposed Rulemaking in CC Docket No. 93124  XJ-` ` a. Operator Services  Y -_96. In 1993 we initiated a rulemaking proceeding in which we proposed that a new service category be created in the traffic sensitive basket for certain operator services  Y -_(Operator Services Notice),  Tg -ԍ See Treatment of Operator Services Under Price Cap Regulation, CC Docket No. 93124,  TA-Notice of Proposed Rulemaking, 8 FCC Rcd 3655 (1993) (Operator Services Notice). specifically, operator transfer service and line status verification. Operator transfer service (also known as "0" transfer) is provided when a LEC operator receives a "0" call from a party seeking to place an interLATA call and the LEC operator transfers that call directly to the interexchange carrier (IXC) selected by that party. Line status verification (also know as busy line verification) is provided when a LEC operator checks, on behalf of an IXC operator, whether a particular access line is either "busy" or outofservice. The LEC operator, after determining that a line is "busy," may  YO-also interrupt that line for emergency purposes (known as busy line interrupt).gOD  TD-ԍ See Operator Services Notice, 8 FCC Rcd 3655 n.1.g  Y!-`97. Since the Operator Services Notice was released, we have created other new  Y -categories, including billing name and address (BNA) in the traffic sensitive basket   T-ԍ BNA Order, 8 FCC Rcd 4478 (1993) (BNA Order); modified on recon. 8 FCC Rcd 6393;  T}-further modified on recon., 8 FCC Rcd 8798. and  Y-signalling for tandem switching in the trunking basket.b  T-ԍ Expanded Interconnection with Local Telephone Company Facilities, Transport Phase II,  T-Third Report and Order, 9 FCC Rcd 2718 (1994)(Expanded Interconnection Third Report and Order). BNA is the name and address provided to a LEC by each of its local exchange customers to which the LEC directs its bills for its services. Provision of BNA by a LEC to one of its IXC customers is a  Y-communications common carrier service which must be provided under tariff.d  T=#-ԍ Second BNA Reconsideration Order, 8 FCC Rcd at 8798.d Signalling for tandem switching is the provision of signalling information necessary for tandem  Y-switching from LEC equal access end offices to a tandem switching provider.p~  T&-ԍ Expanded Interconnection Third Report and Order, 9 FCC Rcd 2718.p "k- 0*(("Ԍ Y-a98. We now seek comment whether operator services should be in its own service  Y-category or combined with any others. We hereby incorporate the Operator Services Notice and the record created in response to that notice into this proceeding. Commenters,  Y-however, should update their remarks in the Operator Services docket to address whether operator services can be consolidated with any other recently established service categories.  Yz-X Issue 8:  Should operator services be placed in its own service category in the traffic sensitive basket or combined with another new or preexisting service category?   X - ` ` b. Call Completion Services  Y -b99. In the Operator Services Notice discussed above, we sought comment on the  Y -price cap treatment of two particular operator services.]  TU-ԍ See Operator Services Notice, 8 FCC Rcd 3655.] Since 1993, when we developed the record in that proceeding, several LECs have begun to provide more general "call completion" services, such as, for example, automated handling of calling card, third party,  Y-or collect calls, or live operator assistance.lj  T-ԍ LECs have established a separate rate element for these services, established pursuant to  T-waiver. See Bell Atlantic Telephone Companies, Southwestern Bell Telephone Company, Petitions for Waiver of Section 69.4(b) of the Commission's Rules, 9 FCC Rcd 7868 (Com. Car. Bur. 1994); BellSouth Telecommunications, Inc. Petition for Waiver of Section 69.4(b) of the Commission's Rules, 10 FCC Rcd 3312 (Com. Car. Bur. 1995); NYNEX Telephone Companies, Petition for Waiver of Section 69.4(b) of the Commission's Rules, 10 FCC Rcd 4593 (Com. Car. Bur. 1995). l As a result, we have not developed a record on the proper price cap treatment of call completion services. For purposes of this Notice, we will refer to these services as "operatorrelated call completion services."  Y;-c100. These services are distinguishable from another service developed since 1993, also referred to as "call completion" service, in which the carrier completes the call for the  Y -end user immediately after providing directory assistance.b D  T-ԍ See Ameritech Operating Companies, 10 FCC Rcd 4559 (Com. Car. Bur. 1995). Ameritech sought a waiver of Part 69 to establish a subelement within the information rate element for this service. The Bureau denied this petition, but granted Ameritech a waiver to establish a new separate rate element outside any existing rate element for this service.  We have not developed a record on the proper price cap treatment of these call completion services either. For purposes of this Notice, we will refer to these services as "directory assistancerelated call completion services." d101. We believe that both operatorrelated and directory assistance call completion services are properly placed in the trafficsensitive basket. We also believe that operatorrelated call completion services are subject to more competition than operator transfer service"l.n 0*((]" and line status verification, because they may be provided by any operator service provider (OSP). Accordingly, placing these services in the same service category as operator transfer service and line status verification may not be appropriate. On the other hand, directory assistancerelated call completion services do not seem likely to be competitive, because access to current directory listings would seem to be necessary to provide this service. e102. Accordingly, we seek comment on the following issues:  YH-X Issue 9a:  What is the proper price cap treatment of operatorrelated call completion services?   Y -X Issue 9b:  What is the proper price cap treatment of directory assistancerelated call completion services?   X - _ 8. General Issues f103. We propose that price cap LECs generally at this time be afforded the relaxed regulatory treatment for the introduction of service offerings and allowed to utilize the pricing flexibilities discussed in this Section IV.B. We request that parties comment on this question: _  Y-X Issue 10a:  As to each proposed relaxation of regulation and pricing flexibility, should LECs be permitted to take advantage of the regulatory relief and pricing flexibility at this time or should they first have to make a showing that a certain level of competition exists before being able to use it? If a showing should be required, what should the showing be and why? g104. We propose that LECs be permitted to take advantage of any or all of the relief and flexibilities proposed in this Section IV.B. at their discretion. All of our proposals are designed to encourage the expeditious introduction of new services and give LECs increased flexibility to reduce rates. We do not believe that the cumulative effect will cause competitive harm. We request that parties comment on the following:  Y-X Issue 10b: What is the relationship between the various regulatory relief and pricing flexibilities we have proposed and should any restrictions be placed on the ability of a LEC to take advantage of one type of relief or flexibility in combination with another? Should some relief be granted only after successful implementation of other forms of relief, or are there other sequencing concerns we should consider?  YU%-  h105. The downward pricing flexibilities provided by our proposals in this Second Further Notice are designed to stimulate the movement of rates for services closer to the"''/0*((P(" costs of those services. We recognize, however, that there may be a concern that LECs might utilize these flexibilities to temporarily decrease prices to drive competitors out of the market or discourage entry and then subsequently raise those prices. We therefore propose additional limits on subsequent upward pricing to preclude this type of anticompetitive behavior. Although rate increases under our existing regulations for most service categories and subcategories are limited to five percent by the upper SBI limit, we propose, with respect to any service category or subcategory in which a LEC makes price reductions pursuant to the pricing flexibilities in this Second Further Notice, that the LEC be subject to a one percent upper SBI limit. This would insure that rate reductions undertaken pursuant to the flexibilities provided in this Second Further Notice are more or less permanent.  Y -X Issue 10c: Should we impose new limits on subsequent upward pricing flexibility after a price has been reduced? If so, what should those limits be? If such limits are unnecessary, explain why they are not needed to protect consumers and to insure a competitive marketplace.  Xc- dJ:\PRICECAP\BASELINE.SHD dJ:\PRICECAP\TRIGGER.SHD _C.Measures of Competition for Regulatory Relief  YL-  X5-  1.` ` Introduction  Y-i106. In the preceding section of this Second Further Notice, we solicit comment on several proposals to relax our requirements relating to the introduction of service offerings, afford price _cap LECs certain additional pricing flexibility within the LEC price cap plan and certain other matters, and whether some or all could be implemented immediately. We are aware that parties may recommend providing this relaxed regulatory treatment only after a LEC has demonstrated that it has begun to face a higher level of competition, or has taken certain steps to remove barriers to competitive entry. We expect that such a demonstration of competitive circumstances would be a lower hurdle to meet than the substantial competition test discussed in Section V for streamlining, and would focus primarily on removal of barriers to competition. In this section, we propose to examine the existence of competitive circumstances within a given geographic and product market in terms of barriers to competitive entry in the market. We tentatively conclude that lowering entry barriers is the most appropriate mechanism for conditioning additional price cap flexibilities because additional flexibilities within the price cap framework are forms of regulatory relief that are intended to allow the LECs to respond to emerging competition, and in some cases that allow efficient competition to occur. In contrast, we propose later in this notice to remove services from price caps altogether once we have evidence of a certain level of actual competition for those services. We believe that in those cases in which pricing flexibility or other regulatory relief is predicated on some demonstration of competitive circumstances, the demonstration should be related to the type of regulatory relief that is being sought. Also, the relief should leave intact the regulation that is necessary to limit or prevent anticompetitive pricing practices. Clearly, some competitive criteria are more relevant to some kinds of regulatory"$'00*((." relief than to others. Parties recommending requiring a demonstration prior to a particular grant of pricing flexibility or other regulatory relief should explain why that particular regulation is necessary to limit or prevent crosssubsidization, predatory pricing or other anticompetitive behavior.  Y- 2.` ` Removal of Barriers to Local Competition (#` j107. We could predicate the granting of relaxed regulatory treatment or additional pricing flexibility on a demonstration that certain barriers to competitive entry into the local services market have been removed. Basing relaxed regulatory treatment and additional pricing flexibility on the elimination of entry barriers can serve as a mechanism for encouraging LECs to open their markets to local competition. k108. Some parties in the first phase of CC Docket No. 941 and in other contexts have developed lists of criteria that they believe provide reasonable indicators that barriers to entry into the market for local service have been lowered sufficiently to warrant some kind  Y-of regulatory relief.`  T -ԍ See NYNEX March 3 Proposal at 4; S. Rep. No. 10423, 104th Cong., 1st Sess. (Mar. 30, 1995), regarding S.652, at Section 251(b); Anne K. Bingaman, Assistant Attorney General for the Antitrust Division for the Department of Justice, speech before the National Press Club on Feb. 28, 1995; Discussion paper of Ray Marshall, former Secretary of Labor, presented at the University of Texas at Austin in May 1994. A copy of this speech and discussion paper will be placed in the docket file for this proceeding at the time this Second Further Notice is released. ` These "competitive checklists" contain many of the same criteria.  Yz-Some criteria common to most, if not all, of these checklists are as follows:z  T-ԍ Most of these criteria are also contained in pending legislation. H.R. 1555, 104th Cong., 1st Sess. (1995); S. 652, 104th Cong., 1st Sess. (1995).  YL-` ` a. competing providers of local switched telephone service have been authorized and have become operational;(#  Y-` ` b. local loops and switches have been unbundled, i.e., a LEC's competitors may obtain access to the local loop directly, without purchasing local switching or other services;(#  Y-` ` c. intrastate expanded interconnection is available through tariff or contract (physical or virtual collocation);(#  Y-` ` d. service provider number portability is available, i.e., end users are able to switch local service providers and retain their current telephone number;(#  Yj-` ` e. compensation arrangements have been established for the LEC and its competitors to complete telephone calls originated on the other carrier's networks;(#  Y%-` ` f. competitors have access to directory assistance, 911, and other databases;(# "1 0*(("Ԍ Y-` ` g. intraLATA toll dialing parity is implemented, i.e., consumers are able to place calls dialing the same number of digits when using any local service provider; and(#  Y-` ` h. competitors have implemented or announced plans to collocate, or otherwise deploy facilities, and serve customers in wire centers (or other geographic areas) that account for a significant portion of the  Yx-incumbent LEC's business lines or interstate access revenues.x  T-ԍ This particular measure is one of nearterm supply elasticity or addressability, but may be an indicator that entry barriers have been removed.(# l109. We note that while some barriers may be directly under the incumbent's control, others are the result of state regulations or statutes. Nonetheless, eliminating stateimposed entry barriers may be necessary to ensure that our proposed modifications to the price cap plan promote competition. m110. We invite comment on basing grants of additional regulatory relief and pricing flexibility on some "competitive checklist" in general. We also seek comment on what items should be included in the checklist to be used for particular grants of regulatory relief and pricing flexibility. Although we do not intend in this proceeding to decide, for example, whether or how local loops should be "unbundled" or how local number portability should be  Yd-achieved,d@  TU-ԍ Telephone Number Portability, Notice of Proposed Rulemaking, CC Docket No. 95116, FCC 95284 (released: July 13, 1995). we are interested in the views of the parties whether the removal of any particular barriers to entry would be truly essential to facilitate competition before we can make any of the proposed changes in LEC price cap regulation. Conversely, we ask parties to address whether the elimination of all barriers to entry would in itself be sufficient to move prices toward cost in the interstate access market. In addition, we seek comment on the relationship between exogenous and endogenous barriers to entry in a price cap LEC's market and the LEC's ability to enter its competitors' or its customers' markets. Finally, we invite commenters to propose any other tests that reasonably could be used as a trigger for the relaxed regulatory measures we propose. For example, some parties have suggested that local bottlenecks to access services can be eliminated by having LECs separate the bottleneck facilities from the provision of access services and offer the unbundled loop elements to competitors at "wholesale" rates. Access services would be offered to endusers only through a subsidiary or affiliate of the LEC, purchasing the loop facilities at the same wholesale rate as competitors. The plan recently implemented in Rochester is one model of  Y"-such an approach,P"  T$-ԍ Rochester Telephone Corp. Order.P and we seek comment on this approach for markets other than Rochester. "2Z0*(( "Ԍ Y-X Issue 11a:  Which of the changes discussed in Section IV.B. herein, if any, should be predicated on a demonstration that certain barriers to entry have been removed, and why? If such a demonstration should be required, should a competitive checklist be used and, if so, what should be included in it? Are there any other tests for the existence of competition that should be used to determine whether regulatory relief and pricing flexibility should be granted? Should any of the proposed changes to our price cap rules be predicated on a demonstration of actual competition or upon some other circumstances and, if so, why?  X -  Y -XIssue 11b:  In addition to adopting a "competitive checklist", are there other steps that need to be taken to ensure competition in the interstate access market. For example, is it necessary for the LECs to separate local bottleneck facilities, such as loops and switching, through a separate subsidiary, and to provide these facilities to all access providers at "wholesale prices"?  Y{- v  Xd- 3.` ` Procedural Matters (#` n111. As discussed above, we are contemplating modifying the price cap plan in various ways when a LEC can show the existence of certain competitive circumstances in a relevant part or parts vof its service region. In this section, we seek comment on the procedures with which the LECs should comply when making these showings. o112. Ideally, the procedural mechanism we adopt would create little or no administrative burden on the Commission, price cap LECs, or other interested parties. Specifically, the required showing should be relatively simple for the LEC to make, while still enabling us and other interested parties to determine relatively quickly that the LEC has in fact met the criteria for the regulatory relief it seeks. p113. One possibility would be to require the carrier to submit a separate filing, prior to filing tariffs, showing that the conditions it faces warrant the relief it seeks. We have a number of options to use as a procedural mechanism for this separate filing, such as waiver requests or petitions for declaratory rulings. If we adopt any regulatory relief based on a checklist as proposed above, we could permit that relief on the basis of a certification letter. Under this approach, the LEC would submit a letter showing that it has met all the criteria spelled out in the checklist, and the relief would be granted automatically unless the Common Carrier Bureau denies certification within a specified period of time. An example of another kind of procedure would be the procedure followed in establishing zone density pricing plans. In that procedure, the LECs were required to submit plans which showed that the assignment of each of their central offices into a zone reflected some costrelated"S%30*((p&" characteristics, such as traffic density or some measure of traffic through each office, which  Y-were reviewed and approved by the Common Carrier Bureau.C  Tb-ԍ See, e.g., Special Access Expanded Interconnection, 7 FCC Rcd at 745455; BellSouth  T<-Telecommunications, Inc., et al., Zone Density Pricing Plans, 8 FCC Rcd 4443 (Com. Car. Bur.  T-1993)(LECs' Zone Density Pricing Plans).C  Y-q114. Another possibility would be to permit carriers to seek regulatory relief in the  Y-context of a tariff filing. This procedure is not optimal, however. In the First Report and  Y-Order, for example, we found that permitting carriers to seek exogenous treatment for certain categories of cost changes in tariff filings makes the tariff review process  Yc-cumbersome and subject to manipulation.Rc  T2 -ԍ First Report and Order, para. 315.R We would prefer the tariff review process to focus on the issues for which it was designed, such as compliance with cost support requirements.  Y -r115. We invite comment on these procedures, and invite parties to propose other procedural methods for LECs to seek the proposed relaxed regulatory relief or additional pricing flexibility within price caps. Commenters should explain why they believe that the procedure they advocate would permit us and other interested parties to determine that the carrier does in fact face the conditions that we have decided warrant some regulatory relief. Parties should also discuss why they believe the procedures they advocate are less administratively burdensome than other procedures that might be used for this purpose.  YO-X Issue 12:  What is the best procedural mechanism for price cap LECs to use when seeking regulatory relief or pricing flexibility within the price cap plan?  X -  dJ:\PRICECAP\TRIGGER.SHD dJ:\PRICECAP\MARKETS.SHD  X-_D.XRelevant Markets (#  X-XX` ` 1.X Introduction(#  Y- s116. As we pointed out in Part A, several of our proposals may require us to evaluate the competitiveness of specific markets. To make such determinations, it is necessary to define _"the relevant market." A relevant market is typically defined to encompass commodities that are easily substituted for each other and may be verified by  Y<-measuring the crosselasticities of demand.<  T#-ԍ Crosselasticity measures the changes in demand (or supply) of commodity X when the price of commodity Y changes. A positive crosselasticity indicates that the commodities are substitutes. A high, positive crosselasticity of demand indicates that purchasers can easily substitute another product or service when the incumbent provider increases its prices. As an example of an approach to defining the relevant market,"480*((%" the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines (Merger Guidelines) define a relevant market as: X(A) group of products and a geographic area in which it is produced or sold such that a hypothetical profitmaximizing firm . . . that was the only present and future producer or seller of the products in that market likely would impose at least a "small but significant and nontransitory increase in price . . .  Y_-."B_  T-ԍ Merger Guidelines, at 4.B  Under the Guidelines, once a properlydefined market is identified, current market participants are identified. To this list are added "uncommitted entrants", or firms which would be likely to enter "within one year and without the expenditure of significant sunk costs of entry and exit, in response to a small but significant and nontransitory' price  Y -increase."C h  T-ԍ Merger Guidelines, at 11.C We propose and seek comments below on an operational model for defining the relevant product and geographic markets in access service. The model must be tailored to provide generally applicable definitions of relevant product and geographic markets that can serve as base units for evaluating competition in access markets.  Xb-/ 2.` ` Relevant Product Market  Y4-t117. Conceptually, the product market can be defined in two ways. One method that  Y-is frequently used in competitive analyses is to rely on the judgment of industry experts.\  T-ԍ Modern Industrial Organization at 806.\ /The alternative approach is to use formal econometric studies that measure longrun crosselasticities of either supply or demand. We believe that market definitions based on judgment are sufficiently useful for evaluating access services and that the existing services categories and subcategories described above are both acceptable and useful. We observe  Y-that they were initially developed after consideration of crosselasticity,  T-ԍ LEC Price Cap Order, 5 FCC Rcd at 6711 (para. 203); BNA Order, 8 FCC Rcd at 4483 (para. 24). and we believe that the fundamental relationships are generally unchanged. Furthermore, the existing definitions are well accepted and understood. We believe that the single product market which was  Ye-defined for interstate services of the IXCse$  T:$-ԍ Common Carrier Services, 95 FCC 2d 554, 56263 (1983)(Common Carrier Services), rev'd  T%-on other grounds sub nom., AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 1992)(AT&T v. FCC). is not the appropriate product market definition for the services of the LECs. "75 0*((["Ԍ Y-u118. We therefore propose to define the relevant product market using existing definitions of current service categories within each access service baskets. Under Parts 61 and 69 of the Commission's Rules, LEC interstate services are divided into common line, traffic sensitive, trunking, and interexchange baskets of services. Within the traffic sensitive basket, there are four services categories: (1) local switching; (2) information; (3) data base access; and (4) billing name and address. The seven categories of the trunking basket are (1) voice grade flatrate transport, voice grade special access, WATS, metallic, and telegraph; (2) audio and video; (3) high capacity and digital data services ( DDS); (4) wide band data and wide band analog; (5) tandemswitch transport;(6) the interconnection charge; and (7) signalling for tandem switching. Within the high capacityDDS service category, there are two subcategories: (a) DS1 special access and DS1 flatrate transport; and (b) DS3 special  Y -access and DS3 flatrate transport.q  T| -ԍ  Section 61.42 of the Commission's Rules, 47 C.F.R.  61.42(e).q In addition to the price cap baskets, service categories, and subcategories, there are various rate elements (billing elements) that are associated with specific costs and/or functions of LEC interstate services. We seek comments on using these access service definitions for defining the relevant market for purposes of determining whether to grant additional pricing flexibility or other regulatory relief within the LEC price cap plan, as well as in streamlining and nondominance determinations.  Yb- Issue 13: Should we use the existing price cap service categories within the baskets to define the relevant product market?(# v119. If alternative definitions are proposed, parties should provide support for their proposals. Parties also should comment on the use of econometric studies to estimate cross elasticities in defining markets and should provide studies that define homogeneous access services.  X- X 3.X` ` Relevant Geographic Market (#`  Y}- w120. We propose to define the geographic market for access services using the  Yf-density zones developed by LECs for the provision of expanded interconnection service.fh  T-ԍ See, e.g., Special Access Expanded Interconnection, 7 FCC Rcd at 745455 (paras. 17980);  TY-LECs' Zone Density Pricing Plans, 8 FCC Rcd 4443. It is likely  that demand and supply elasticities in a particular geographic area served by a given LEC will differ from the demand and supply elasticities in other geographic areas served by it or another LEC. This implies that a single national market, which was defined for  Y -interstate services of the IXCs,   T$-ԍ Common Carrier Services, 95 FCC 2d at 56263, rev'd on other grounds sub nom., AT&T v.  Ty%-FCC. is not the appropriate geographic market definition for the services of the LECs. The relevant geographic market must be narrow enough to only encompass competing access services for the same set of customers, yet be broad enough to"6`0*(( " be administratively workable. Defining the relevant geographic market incorrectly will misstate competition. We believe that densitybased zones of the kind adopted in the expanded interconnection proceeding generally reflect the individual markets for access services.  Y-x121. When we adopted the expanded interconnection rules,t  T-ԍ Special Access Expanded Interconnection Order, 7 FCC Rcd at 745155.t we permitted LECs to establish three or more pricing zones for special access services within each study area,  Y_-based primarily on traffic density._j  Tz -ԍ The LECs are required to provide additional justification to establish more than three zones and such proposals are subject to greater scrutiny by the Commission. We subsequently permitted LECs to establish zone  YH-density pricing for switched transport services as well.H  T -ԍ Switched Transport Expanded Interconnection Order, 8 FCC Rcd at 7426-27 (paras. 98-101). We required the LECs to file and obtain approval of their zone density pricing plans. In filing a proposal, the LECs must assign each central office in a study area to a zone. The LECs must make a showing that the assignment of central offices to each of the zones reflects costrelated characteristics, such as traffic density or some measure of traffic through each office. Geographic contiguity may also be considered as well as communities of interest, but these are less important factors in  Y -establishing the pricing zones than traffic density.t   T-ԍ Special Access Expanded Interconnection Order, 7 FCC Rcd at 745155.t LECs are permitted to redefine one or  Y -more central offices from one zone to another. &  T~-ԍ See GTE Service Corporation, Revised Zone Density Pricing Plan, 10 FCC Rcd 5696 (Com. Car. Bur. May 2, 1995).  Yy-y122. The pricing zones with the highest traffic density are designated as Zone 1. Because they tend to serve highvolume customers, Zone 1 offices generally represent a disproportionately large level of switched minutes of use and central office equipment investment. These high densities make Zone 1 offices the most attractive areas for entry by competitors and, therefore, may represent the geographic markets in which the LECs are most likely to take advantage of the pricing flexibility we are proposing herein.  Y- z123. As noted earlier, we have permitted LECs to geographically deaverage their  Y-rates in response to competitive pressure on a limited basis,  T#-ԍ Special Access Expanded Interconnection Order; Switched Transport Expanded Interconnection  T#-Order; NYNEX Universal Service Waiver Order. and are considering a pending"7 0*(("  Y-request for some further limited geographic deaveraging in another proceeding.  Ty-ԍ See Petition for Declaratory Ruling and Related Waivers to Establish a New Regulatory Model for the Ameritech Region (Mar. 1, 1995); Update to Ameritech Customers First Waiver Request (Apr. 12, 1995). We believe that if we condition the regulatory relief and pricing flexibility discussed in Section IV.B. on a showing of competitive conditions in a geographic market smaller than a study area, then the relief and flexibility should only be given in that geographic market within which the competition exists. We recognize that this will further expand the number of instances in which we currently permit geographic deaveraging. We therefore seek comment on the following questions:  X_-  YH-XIssue 14a:  Should the Commission adopt densitybased pricing zones as the relevant geographic market for assessing competition and granting regulatory relief under price caps? Should some other defined geographic area be used?  Y -X Issue 14b:  If we condition the regulatory relief and pricing flexibility discussed in Section IV.B. on a demonstration of competitive conditions, should the relief and flexibility be allowed only in the geographic market in which the demonstration of competitive conditions has been made? How would this affect interstate toll rates? Should the relief and flexibility be permitted in an entire study area even if a demonstration of competitive conditions has been made only in a portion of the study area? {124. Parties supporting the use of density zones in this context should comment on whether these zones would be valid market definitions for all access service baskets and categories or only for specific ones. The original pricing zone definitions were based on traffic densities and cost characteristics for the trunking basket. The Commission assumed that LEC costs were likely to be the lowest and competition the most vigorous for trunking services in the zones with the highest amounts of trunking traffic. As a result, the zones may not be useful in defining relevant geographic markets for services in the traffic sensitive, common line and interexchange baskets. We also seek comment on whether different pricing zones should be established for different service baskets based on their particular cost characteristics or other criteria. In addition, only three different zone levels are used today. For some services, however, three pricing zones may not be adequate to reflect the differing states of competition. Should the number of pricing zones that a LEC can establish without additional scrutiny and justification be increased? Commenters advocating increasing the number of zones should address whether that would also increase administrative costs for LECs or the Commission. We also have some concerns over the configuration of zones. Reflective of the marketplace, the pricing zones for trunking services have developed in a"!80*(("" checkerboard fashion, rather than in contiguous geographic areas. Does this characteristic pose any significant disadvantage for defining geographic markets for our plan?  Y-|125.` ` Another approach for defining the geographic market would be to use preexisting, fixed geographic units, such as study areas, Local Access and Transport Areas (LATAs), or Metropolitan Statistical Areas (MSAs). LATAs or MSAs may be too heterogeneous to provide useful definitions of competitive geographic markets. There may or may not be some administrative benefit in defining markets as contiguous areas. Parties that believe that these fixed boundary geographic units should be used should explain what geographic units they recommend and how these units reflect a market for various access services.  Y -}126.` ` Other possible geographic definitions have been proposed by participants to the  Y -First Report and Order. In its prior comments, USTA proposed defining the relevant market  Y -area by individual wire center.Z  T9-ԍ See First Report and Order, paras. 37273.Z According to USTA, the LEC wire center is the smallest geographic area to which a competitive market analysis can be applied; therefore, it would be the most precise geographic area for measuring competition. We recognize that USTA's proposal was developed some time ago. USTA may now support a broader definition. In any event we are disinclined to adopt a wire center definition because there it would create thousands of individual markets and impose substantial administrative burdens on both the industry and this agency. One possible solution would be to consolidate individual wire centers into geographic markets in some rational way, based on competitive considerations. Parties advocating a wire center approach for defining the market should address the administrative advantages and disadvantages of using wire centers for purposes of assessing competition. Is it feasible for us to evaluate competition in each wire center, and what, if anything, can be done to ease administrative burdens associated with that approach? Advocates of this approach also should discuss possible methods for combining them into economically meaningful and administratively reasonable units. Parties recommending consolidation of individual wire centers into geographic markets also should propose a procedural mechanism for determining the grouping of specific wire centers.  X"- dJ:\PRICECAP\MARKETS.SHD dJ:\PRICECAP\STREAM.SHD #&m PE37D&P#X01Í ÍX01Í Í#Xw PE37132. In the Commercial Services Order, the Commission found that AT&T's Basket 1  d(#commercial long distance services are subject to substantial competition and that AT&T lacks"< 0*(( "  Y- d(#unilateral market power in the provision of these services.j  Ty-ԍ Commercial Services Order, 10 FCC Rcd at 3011, 3014.j The Commission therefore  d(#jconcluded that there is sufficient competition among providers to justify moving AT&T's  Y- d(#hcommercial services from price cap regulation to streamlined regulation.j  T-ԍ Commercial Services Order, 10 FCC Rcd at 3014; id. at 3018 (permitting AT&T to offer commercial long distance services under streamlined regulation enables AT&T to enter into contracts with customers for these services). Consistent with the  Y- d(#approach followed in the Interexchange Order, the Commission's market analysis rested on  Y-considerations of market share, demand responsiveness, and supply responsiveness.S  T -ԍ Commercial Services Order, 10 FCC Rcd at 3014. Unlike the Commission's approach in the  T -Interexchange Order, however, the Commission's analysis in the Commercial Services Order was not based on AT&T's pricing of commercial services under price cap regulation.S  Xx- xB.XProposed Factors for Determining When Streamlined Regulation Is Warranted (#  v 133. Based on a review of the information currently available to us, we believe that  d(#increased competition for LEC services is inevitable. We seek comment on whether the  Y - d(#Manalytical framework that the Commission applied in the Interexchange Order and the  Y - d(#xCommercial Services Order is a reasonable basis for determining which of the LECs' services  d(#should be accorded streamlined regulation. Specifically, we propose that a price cap LEC  d(#Mservice be permitted streamlined regulation when such service is subject to substantial  d(#;competition, based on considerations of demand responsiveness, supply responsiveness, market  d(#Jshare, and pricing trends. We request comment on the relative importance of these factors and on any other factors that may be proposed.  Xh- 1.` ` Demand Responsiveness  YQ-  v 134. Demand elasticity measures the sensitivity of quantity demanded to price changes.  d(#It indicates what the percentage change in the quantity demanded for a particular product will  Y -be following a one percent increase in the price of that product.   T-ԍ Robert S. Pindyck and Daniel L Rubinfeld, Microeconomics, Macmillan Publishing Company New York, 1992, p.29.   Y- v 135. In the Interexchange Order, the Commission's determination that customers of  d(#business services are to a large degree demandelastic was based on evidence that these  d(#customers tend to be sophisticated and knowledgeable purchasers of telecommunications services  d(#lwho exercised their "buyer power" by soliciting competitive bids before procuring  Y- d(#telecommunications services.W  T&-ԍ Interexchange Order, 6 FCC Rcd at 5887.W The Commission also found that AT&T's market share in the"=, 0*((|"  Y- d(#xbusiness services segment was significantly lower than in other segmentsW  Ty-ԍ Interexchange Order, 6 FCC Rcd at 5887.W and that AT&T's  d(#competitors had invested considerable capital in expanding their supply capacity and would not  d(#have done so if they were convinced that they would be unable to attract substantial numbers of  Y-new customers over time.<j  T-ԍ Id. at 5888.<  Y- v 136. In the Commercial Services Order, the Commission determined that AT&T's  d(#<principal competitors provide a number of commercial services that are comparable to those  d(#offered by AT&T, and that customers are well aware of and make use of these alternative  YJ- d(#suppliers.^J   T -ԍ Commercial Services Order, 10 FCC Rcd at 3016.^ The Commission found that evidence indicating that approximately 23 percent of  d(#AT&T's commercial customers annually switch either from AT&T to another long distance  d(#provider or from another provider to AT&T annually provides "strong support for the argument  Y - d(#that AT&T lacks market power over its customers."^   Td-ԍ Commercial Services Order, 10 FCC Rcd at 3016.^ The Commission concluded that  d(#fluctuations in AT&T's market share from 54 percent in 1987, to 39 percent in 1991, to 44  d(#Ypercent in 1993, corroborated evidence that commercial customers are significantly sensitive to  Y -price and quality changes.a P  T-ԍ Commercial Services Order, 10 FCC Rcd at 301516.a  Y- v 137. We believe that strong evidence of competition in the interstate access market exists  d(#where services comparable to those offered by the LECs are available to their customers, a  d(#significant number of those customers have the ability to evaluate the full range of market  d(#options available to them, and these customers do in fact exercise these options. We therefore  d(#propose that the demand responsiveness of the LECs' customers should be an important factor  d(#in assessing the level of competition for LEC services for purposes of determining whether a service should be accorded streamlined regulation.  Y- z ` XIssue 15a:  Should demandresponsiveness be a factor in determining the level  z `bof competition for purposes of determining whether services should  z `9be streamlined? What should be the relevant factors in  z `'determining whether a LEC's customers are demandresponsive?  z `What data and information would be necessary and relevant in  z `'determining whether a LEC's customers are demandresponsive?  z `Does the fact that LECs have relatively few customers that account  z `for most of their interstate access demand affect the usefulness of  z `7demandresponsiveness as a factor in determining the level of competition? ">0*((;"Ԍ X-ԙX v2.X` ` Supply Responsiveness (#`  Y- v z138. Supply responsiveness is a critical element in evaluating the level of competition  d(#for access services. As a conceptual matter, supply responsiveness or elasticity is measured  d(#using a parallel concept to that used for demand. It measures the percentage change in the  Y- d(#quantity vsupplied resulting from a one percent increase in the price of a product.  T-ԍ Robert S. Pindyck and Daniel L Rubinfeld, Microeconomics, Macmillan Publishing Company New York, 1992, p.32. A high  d(#supply elasticity indicates that entry is relatively easy and that any attempt by an incumbent to  d(#raise prices will result in new entry. Conversely, a low supply elasticity is indicative of market power.  Y - v [139. Competitive response in the access market has two major sources. In the short run,  d(#I competitors will respond to price increases by using existing capacity, while in the long run, new  d(#capacity will be built. A competitor's ability to utilize existing capacity in response to a price  Y - d(#increase is measured by "addressability." B  T-ԍ Addressability is narrower than supply elasticity. Supply elasticity measures both addressability (immediate ability of competitors to supply additional capacity if prices rise) and the additional capacity that could easily be added by competitors and new entrants as prices rise. USTA asserts that for a customer's demand to be addressable an alternative provider must have facilities that can readily extend services to the customer upon request. It states that a measure of addressability is based on observable fact the physical presence of alternative providers with the capacity and geographic coverage to serve a substantial portion of the market. USTA Comments, June 29, 1994. The presence of available, unused capacity of  d(#competitors is believed to constrain the exercise of market power by limiting the ability of  Y - d(#dominant firms to raise prices above competitive levels.d  TJ-ԍ See Interexchange Order, 6 FCC Rcd at 588889. d Once competitive capacity is built  d(#and available, attempts by an entity to restrain output and raise prices will encourage alternative  d(#suppliers to increase production, thereby protecting the customers from the first entity's actions.  d(#Although addressability in principle measures available alternative capacity, it is unclear how  d(#hit should be measured and whether adequate data are available to permit us to use it to evaluate  d(#whether competitive circumstances are sufficient to allow regulatory relief. Addressability also  Y- d(#=appears to be relative rather than absolute. In some cases, available capacity can be used  d(#himmediately as a substitute for the incumbent's capacity and in other cases much longer periods  d(#Yare required before the capacity can actually be used to provide access services. There also are  d(#questions regarding how well some types of capacity can be substituted for other types and at  d(#what cost specific customers can avail themselves of alternative capacity. In the long run,  d(#wcompetitive responsiveness will depend on the ease of entry and alternative technologies which  d(#<permit new entrants to respond to price increases. Such entry will be vital in establishing a competitive market for access services. "e? 0*((]"Ԍ Y- v =140. In the Interexchange Order, the Commission's determination that supply elasticities  d(#in the interstate interexchange business services marketplace are high was based on evidence that  d(#AT&T's competitors had substantial excess capacity available immediately and in the relative  Y- d(#shortterm.  T6-ԍ Interexchange Order, 6 FCC Rcd at 588889. Specifically, the Commission found that MCI and Sprint could immediately absorb as much as 15 percent of AT&T's business day traffic without any expansion of their existing capacity. The Commission determined that this capacity was in itself more than sufficient to constrain AT&T's pricing behavior insofar as this capacity could accommodate a substantial number of new customers. The Commission also found that Sprint and MCI together could add about 25 billion minutes of new capacity to their networks for a combined investment of  TH -about $600 million. Id.Į In the Commercial Services Order, the Commission determined that there  d(#lappeared to be a high elasticity of supply among AT&T's commercial long distance  Y- d(#Jcompetitors^|  T -ԍ  Commercial Services Order, 10 FCC Rcd at 3016.^ based upon evidence that AT&T's competitors appear to have sufficient network  d(#capacity to serve a significant portion of AT&T's commercial long distance traffic and that  d(#AT&T's competitors have a proportionately greater supply of unused fiber capacity than  YL- d(#AT&T. <L  T-ԍ Commercial Services Order, 10 FCC Rcd at 3017; id. ("much of the network capacity owned  T-by the long distance carriers is fiber optic technology"); id. (noting that in 1993, AT&T owned 47 percent of the total fiber miles while serving 60 percent of the minutes of use of the interexchange market, while, in contrast, all other interexchange carriers owned 53 percent of the total fiber miles while serving 40 percent of the interexchange market).  Evidence that AT&T's commercial long distance traffic represented a small portion  d(#+ of the overall switched traffic and that other carriers could absorb all of AT&T's traffic provided  d(#<additional support for the Commission's finding of high elasticity of supply among AT&T's  Y -commercial long distance competitors.` "  T-ԍ Commercial Service Order, 10 FCC Rcd at 301718.`  Y - v |141. We believe that supply elasticities of a LEC's competitors are important in  d(#assessing the level of competition for LEC services. We believe that sufficient excess or readily  d(#available supply capacities enable firms with relatively small market shares to be wellpositioned  d(#Zto capture large numbers of their competitors' customers if their competitors choose to price  Y}- d(#<above competitive rates.d}  T -ԍ See Interexchange Order, 6 FCC Rcd at 5888; Commercial Services Order, 10 FCC Rcd at  T!-3017; see also generally id. ("competitors must be willing and able to serve a significant portion of AT&T's commercial long distance traffic in response to a price increase, but by no means all of its traffic, in order to deter a price increase"). We therefore propose that the relative supply capabilities of the  d(#LECs' competitors should be an important factor to be considered in assessing the level of  d(#competition for LEC services for purposes of determining whether a service should be accorded  Y8-streamlined regulation. "!@0*(("Ԍ Y- z ` X Issue 15b:  Should supplyresponsiveness be a factor in determining the level  z `bof competition for purposes of determining whether services should  z `9be streamlined? What should be the relevant factors in  z `determining whether a LEC's competitors have enough readily  z `cavailable supply capacity to constrain the LEC's market behavior  z `and inhibit it from charging excess rates? What data and  z `information would be necessary and relevant in determining whether a LEC's competitors are supplyresponsive?  YI-  X2-xX ` ` 3. Market Share(#  Y - v  142. In the Interexchange Order, the Commission found that AT&T's 50 percent share  d(#of the Basket 3 business services market was "a level that is not incompatible with a highly  d(#competitive market" and, hence does not by itself demonstrate that a firm possesses market  Y - d(#xpower.j  T:-ԍ Interexchange Order, 6 FCC Rcd at 5890 (footnote omitted).j In the Commercial Services Order, the Commission determined that AT&T's 44  d(#ypercent share of the overall minutes of use of commercial long distance services provided  Y- d(#evidence of AT&T's lack of unilateral market power.^j  T-ԍ Commercial Services Order, 10 FCC Rcd at 3015.^ The Commission also found that the  d(#ifluctuations in AT&T's market share indicated the "considerable" willingness of commercial  d(#<long distance customers to shift between long distance service carriers and provided further  YP- d(#evidence of AT&T's lack of unilateral market power.P   T -ԍ Commercial Services Order, 10 FCC Rcd at 3015. As noted supra, AT&T's market share  T-fluctuated from 54 percent in 1987, to 39 percent in 1991, to 44 percent in 1993. Id. In addition, the Commission found that  d(#the market size of AT&T's competitors relative to AT&T suggested that they have capacity to  d(#service a significant portion of AT&T's customers, should these customers desire to switch  Y -carriers.K   TD-ԍ Commercial Services Order, 10 FCC Rcd at 3015. In comparison to AT&T's 44 percent share, MCI's share of this market in 1993 was 21 percent, Sprint's share was 13 percent, and all  T-other long distance providers had a combined market share of 20 percent.  Id.K  Y- v =143. We believe that market share should be one factor, among others, to be considered  d(#in determining the level of competition in a given market for purposes of streamlined regulation.  d(#As discussed above, a high market share does not necessarily confer market power. A company  d(#that enjoys a very high market share will be constrained from raising its prices above cost if the  Y- d(#market is characterized by high supply and demand elasticities.W  T%-ԍ Interexchange Order, 6 FCC Rcd at 5887.W We believe that an analysis  d(#xof the level of competition for LEC services based solely on a LEC's market share at a given  d(#point in time would be too static and onedimensional. However, while we do not propose to"SA~ 0*((k"  d(#Jignore market share data in assessing the level of competition for LEC services, we do propose  d(# considering market share in conjunction with other factors, including, but not necessarily limited to, supply and demand elasticities and pricing trends.  Y- z `t XIssue 15c:  Should market share be a factor in determining the level of  z `rcompetition for purposes of determining whether services should  z `6be streamlined? If the Commission considers the relative market  z `share of the LECs and their competitors as one factor in assessing  z `the level of competition for LEC services, what data and  z `&information would be necessary to assess the relative market shares  Y - z `of the LECs and their competitors? What should be the relative  z `importance of the market share of the LECs and their competitors  z `in light of other factors incorporated into our analysis and on any other factors that may be proposed?  X - 4.` ` Pricing of Services Under Price Cap Regulation  Yz- v @ 144. In the Interexchange Order, AT&T's pricing of business services since the  d(#implementation of price cap regulation provided additional support for the Commission's finding  YN- d(#of substantial competition in the business services segment of the long distance marketplace.XN  T-ԍ Interexchange Order, 6 FCC Rcd at 5889. X  d(#The Commission stated that none of AT&T's tariff filings for Basket 3 business services  d(#exceeded the price cap ceiling, and all but one of AT&T's Basket 3 filings were below the  Y - d(#applicable upper service rate band._ j  T$-ԍ Interexchange Order, 6 FCC Rcd at 5889. The one Basket 3 tariff filing that was not below the upper rate band was an analog private line filing at the upper rate band. The Commission did not  T-streamline the regulation of AT&T's analog private line services. Id. at 5889 n.88._ The Commission determined that this pricing behavior for  Y-Basket 3 services reflected the competitiveness of business services.X  Ta-ԍ Interexchange Order, 6 FCC Rcd at 5889. X  Y- v 145. We believe that evidence that a price cap LEC is pricing services below the price  d(#cap ceiling over a sustained period of time may indicate that such services are subject to  d(#competitive pressures, particularly in markets with high supply and demand elasticities.  d(# Conversely, we do not believe that a LEC's lowerthanrequired pricing of services is necessarily  d(#a reliable measure of competition in a market without such high supply and demand elasticities.  d(#We therefore propose that evidence that a price cap LEC is pricing services below the price cap  d(#xceiling over a sustained period of time should be considered as additional evidence that such  d(#services are subject to competitive pressures in markets with high supply and demand elasticities. "B`0*(( "Ԍ Y- z ` XIssue 15d: Should we consider evidence that a price cap LEC is pricing  z `5services below the price cap ceiling over a sustained period of time  z `as additional evidence that such services are subject to competitive  z `pressures in markets with high supply and demand elasticities? If  z `so, what is the competitive significance of a LEC's pricing below the price cap ceiling for such a period?  X`- v5.` ` Other Factors  YI-  v [146. Although we believe that the demand and supply elasticities are the most important  d(#factors to be considered in assessing the level of competition for LEC services for purposes of  d(#,streamlined regulation, we invite comment and discussion on additional factors that we should  d(#vconsider in an evaluation of LEC competition, for example elimination of barriers to entry in the event it is not otherwise required.  Y - z ` XIssue 15e:  Should the Commission consider factors other than demand  z `Tresponsiveness, supply responsiveness, market share, and pricing  z `behavior in assessing the level of competition for LEC services?  z `If the Commission considers such other factors in assessing the  z `level of competition for LEC services, what data and information  z ` would be necessary to assess the relative importance of these factors?  X- xC.Contract Carriage  Y- v 147. In the Interexchange Order, the Commission adopted rules permitting the  Y- d(#+ interexchange carriers to offer services pursuant to individually negotiated contracts, but allowed  Y- d(#AT&T to offer contract rates only for services found subject to substantial competition and  Y- d(#xaccorded streamlined regulation.X  T-ԍ Interexchange Order, 6 FCC Rcd at 5897. X The Commission required that all individually negotiated  d(#wcontracts offered by the interexchange carriers be made generally available to similarly situated  d(#Ycustomers under substantially similar circumstances so as to comply with the nondiscrimination  Y;- d(#provisions of the Communications Act.W;j  TV -ԍ Interexchange Order, 6 FCC Rcd at 5897.W The Commission found that allowing AT&T the  d(#Zfreedom to enter into contracts with customers for services subject to streamlined regulation  d(#would benefit consumers without increasing the risk of anticompetitive or "other undesirable  Y- d(#behavior by AT&T."W   T$-ԍ Interexchange Order, 6 FCC Rcd at 5899.W AT&T is required to file, at least fourteen days prior to the effective"C0*(("  d(#jdate of its contracts, a tariff based on the terms of the contract containing all information  Y-required under Section 203 of the Act.  Tb-ԍ  Interexchange Order, 6 FCC Rcd at 5897. Specifically, AT&T is required to file a tariff summarizing the contract and containing the following information: (1) the term of the contract, including any renewal options; (2) a brief description of each of the services provided under the contract; (3) minimum volume commitments for each service; (4) the contract price for each service or services at the volume levels committed to by the customers; (5) a general description of any volume discounts built into the contract rate structure; and (6) a general description of other  Tt-classifications, practices, and regulations affecting the contract rate. Id. at 5902.   Y- v 148. We propose to permit the price cap LECs to offer contract prices for access  d(#-services that the Commission has found subject to substantial competition and are subject to  d(#-streamlined regulation, provided the contract rates are made generally available to similarly  d(#situated customers under substantially similar circumstances. Permitting the price cap LECs to  d(#offer such contract rates would seemingly offer significant benefits for consumers without  d(#increasing the risk of anticompetitive, unreasonably discriminatory, or otherwise undesirable  d(#behavior by the LECs. Contract carriage would benefit consumers by allowing them to negotiate  d(#service arrangements that best address their particular needs. Moreover, by requiring  d(#;individually negotiated contract arrangements to be made generally available to other similarly  d(#situated customers, other customers would be able to reap the benefits of these new, more  d(#xspecialized arrangements. Contract carriage would further benefit consumers by stimulating  d(#competition for such streamlined services. By allowing the LECs to offer customers the same  d(#htypes of contract services that the LECs' competitors may already be offering, contract carriage  Y- d(#will expand customers' choices.|  T-ԍ Nondominant common carriers routinely file contract rates for interstate services. Tariff  T-filings by nondominant common carriers are presumed lawful. See Section 1.773 of the Commission's Rules, 47 C.F.R.  1.773. This, in turn, will likely result in better service options from  d(#all carriers. Contract carriage can promote efficiencies that the LECs will be able to share with  d(#their contract customers. Also, permitting carriers to offer contract rates to win business that they might otherwise lose to a competitor might result in lower prices for consumers.  Y- v 149. We do not believe that our contract carriage proposal will lead to predatory pricing  d(#as such contracts must be made generally available and are typically long term. Further, as  d(#Ydiscussed above, predatory pricing is likely to occur only if a carrier can eliminate competition  d(#and continue to deter potential competitors from entering the marketplace. Once competitors  d(#have invested substantial sunk costs necessary to participate in the access market, the existence  d(#of those facilities will deter the incumbent from raising rates in the future. We also do not  d(#believe that a LEC could effect a predatory scheme without detection in light of our proposal  d(#that contract terms be made public. Nor do we think that our contract carriage proposal will  d(#present an undue risk of discrimination. First, we would require the price cap LECs to make  d(#its contracts generally available to similarly situated customers so as to comply with the Section"ND 0*((>"  Y- d(#202(a) nondiscrimination provisions of the Communications Act.@  Ty-ԍ 47 U.S.C.  202(a).@ Second, contract carriage  d(#would only be allowed for services subject to substantial competition. Such competition would  d(# help to ensure that all customers purchasing services subject to streamlined review would receive  d(#just, reasonable and nondiscriminatory rates, regardless of whether the purchase is made pursuant to generic or contractbased tariffs.  Yv-w150. With these considerations in mind, we request comment on the following issues:  YH- z `  XIssue 16a:  Should the Commission allow the price cap LECs to offer  Y2- z `5 individually negotiated contracts for services subject to streamlined  z `6regulation, provided such contracts are made generally available  z `wto similarly situated customers under substantially similar  z `circumstances? In particular, would allowing such contract  z `rcarriage benefit consumer welfare, foster competition, and foster  z ` efficient use of the network? Would allowing such contract carriage result in unreasonable price discrimination?  Yz- z `  XIssue 16b:  If such contracts should be allowed, what tariff filings  z `requirements should we adopt for such contract rates?  z `Specifically, should we require the LECs to file on 14 days' notice  z `a tariff summarizing the contract and containing the following  z ` information: (1) the term of the contract, including any renewal  z `options; (2) a brief description of each of the services provided  z `under the contract; (3) minimum volume commitments for each  z `service; (4) the contract price for each service or services at the  z `Vvolume levels committed to by the customers; (5) a general  z `description of any volume discounts built into the contract rate  z `structure; and (6) a general description of other classifications, practices, and regulations affecting the contract rate?  Xg-  XP-D.  Procedural Matters  v 151. In this section we seek comment on what procedures the Commission should follow  d(#in considering whether a particular service in a given market should be subject to streamlined  d(#regulation outside the price cap plan. The level of competition for each LEC access service is  d(# likely to vary from one geographic market to another. We propose, therefore, that consideration  d(#of the transition of a service to streamlined regulation should be initiated by the filing of a  d(#petition by the LEC seeking streamlined regulation and that the petitioner shall have the burden  d(#to show that streamlined regulation is justified. We seek comment on what type of petition the  d(#LEC should file to seek streamlined regulation for a particular service in a given market a"#Eh0*(($"  d(#petition for waiver, a petition for a declaratory ruling or some other sort of petition as well as the procedures and standards which would apply in our review of the matter.  Y- z `sX Issue 17:  What procedure should be followed to implement streamlined regulation for a LEC?   Xw- v?  VI. NONDOMINANT TREATMENT ă  v [152. As discussed above, we envision a threepart framework for our adaptive price cap  d(#-regulation. In addition to providing certain regulatory relief within the price cap plan, and  d(#streamlining certain services out of price cap regulation, we would consider a LEC nondominant  d(#wvand forbear from price regulation to the extent permitted under the Communications Act where a LEC is shown to lack market power.  v z153. Currently, we define carriers as either dominant or nondominant in the domestic  d(#market as a whole. A carrier is classified as dominant if it has market power in the domestic  d(#Lmarket as a whole. We have not held that a carrier is dominant in the provision of some  Yz- d(#domestic services but not dominant for others.>z  T-ԍ  See Policy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities Authorization Therefor, CC Docket No. 79252, First Report and Order, 85 FCC 2d 1, 22,  T-n. 55, 24, n. 61 (1980) (First Competitive Carrier Order).> Nor have we held that a carrier is dominant  Yc- d(#in one geographic market but not dominant in another.<c  T0-ԍ We note, however, that we have held that AT&T is dominant in the provision of international  T-message telephone service (IMTS), but is nondominant in the provision of nonIMTS services, i.e., telex, telegram, TWX, private line, high and low speed data, videoconferencing and International Business Service. International Competitive Carrier Policies, Report and Order, 102 FCC 2d 812,  T-834 (1985), recon. denied, 60 Pike & Fischer 1435 (1986). When the Commission adopted this  d(#approach for determining market power, however, we explicitly recognized it as a "conservative  Y5- d(#approach to regulation."d5  T-ԍ First Competitive Carrier Order at 22, fn. 55.d After more than a decade of experience with this approach for  d(#determining market power, and with the advent of emerging competition in the interexchange  d(#<access market, we believe a less encompassing definition of market power for LECs may be  d(#appropriate. Indeed, there appears to be no reason why a LEC should be considered dominant  d(#jin any new geographic markets it may enter outside its traditional region. Moreover, we  d(#recently have received several petitions in which price cap LECs or their affiliates seek  Y- d(#xnondominant treatment for some services and geographic markets only.~  T$-ԍ See Petition to Regulate Bell Atlantic as a Nondominant Provider of Interstate InterLATA  T$-Corridor Service (filed July 7, 1995) (Bell Atlantic Interexchange Corridor Nondominance Petition);  T%- Ameritech Communications, Inc. Petition for Nondominant Status, (filed July 21, 1995).~ For example, Bell  d(#zAtlantic has filed a petition seeking regulation as a nondominant provider of interstate"F0*(("  Y- d(#,interLATA services in the corridor areas it serves.q  Ty-ԍ Bell Atlantic Interexchange Corridor Nondominance Petition.q We propose that a LEC be allowed to be  d(#regulated as nondominant with respect to a particular service and with respect to a particular  Y- d(#geographic market.Oj  T-ԍ See Section IV.D., supra.O We would permit nondominant carriers to file tariffs on one day's notice,  Y-and would not require them to submit cost support.d   Tx-ԍ The Commission's Rules governing tariff filings by nondominant carriers, Section 61.20, et.  TR -seq., of the Commission's Rules, 47 C.F.R.  61.20, et. seq., have been vacated. Southwestern Bell  T, -Telephone Co. v. FCC, 43 F.3d 1515 (D.C. Cir. 1995) (Southwestern Bell v. FCC). The  T -Commission is currently in the process of revising its rules to conform to the court's decision. See Public Notice, Tariff Filing Requirements for Nondominant Common Carriers, 10 FCC Rcd 4074 (1995).d  Y-154. Accordingly, we seek comment on the following issues:  YH- z `X Issue 18:  Should we adopt rules now that would define the conditions LECs  z `Fmust meet to be considered nondominant? If so, should those  Y - z `conditions be what we used in Competitive Carrier, or some other  z `conditions? Are there any reasons not to regulate a LEC as  z `6nondominant for some services and dominant for other services?  z `Are there any reasons not to regulate a LEC as nondominant in  z `5some geographic markets and dominant in others? What procedure  z `Gshould a LEC follow to obtain nondominant status? What  z `procedures would apply to a carrier that is determined to be nondominant?  v ]155. First, we invite parties to discuss whether any LECs are likely to lose market  d(#Ypower for any geographic and product markets in the foreseeable future, and if not, whether it  d(#is premature at this time to adopt rules governing nondominant local exchange carriers at this  d(#/time. Parties who maintain that it is not premature to consider the possibility of LEC  d(#Znondominance at some time in the future should provide support for their positions. Parties  d(#Zshould also discuss whether there are specific services, such as services in the interexchange  Y-basket, for which LECs are likely to become nondominant sooner than others.  Ta"-ԍ See First Report and Order, para. 407 (discussing Bell Atlantic's and Ameritech's claims that their interstate intraLATA toll and corridor interexchange services should be removed from price caps). "G> 0*(("Ԍ Y- v 156. Second, we solicit comment on the criteria that a LEC must meet to be considered  Y- d(#nondominant in the provision of one or more services. In the Competitive Carrier proceeding,2  Tb-ԍ First Competitive Carrier Order, 85 FCC 2d 1; Second Report and Order, 91 FCC 2d 59  T<-(1982), recon. denied, 93 FCC 2d 54 (1983); Third Report and Order, 48 Fed.Reg. 46,791 (1983);  T-Fourth Report and Order, 95 FCC 2d 554 (1984) (Fourth Competitive Carrier Order), vacated,  T-AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 1992), cert. denied, MCI Telecommunication Corp. v. FCC, 113 S.Ct. 3020 (1993); Fifth Report and Order, 98 FCC 2d 1191 (1984); Sixth Report and  T-Order, 99 FCC 2d 1020 (1985) (Sixth Competitive Carrier Order); rev'd, MCI Telecommunications  T|-Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985) (collectively, Competitive Carrier). 2  Y- d(#we defined a "dominant" firm as one with market power; i.e., the power to control prices or  d(#foreclose market entry. We used a number of criteria to determine whether a firm has market  d(# power, such as the number and size of competitors, the existence of barriers to entry, availability  d(#;of substitute services, control of bottleneck facilities. We considered control of bottlenecks as  Yz- d(#prima facie evidence of market power. We also found that, in general, a firm or group of firms  d(#has control over a bottleneck when it has sufficient command over some essential commodity  YN- d(#or facility in its industry to be able to impede new entrants.sN  T-ԍ First Competitive Carrier Order, 85 FCC 2d 1, 2022 (paras. 5559).s In the Competitive Carrier  d(#proceeding, we concluded that we could "forbear" from applying certain tariffing requirements  Y" - d(#Yto nondominant carriers." &  T-ԍ Specifically, in the Fourth Competitive Carrier Order, we adopted "permissive detariffing," which permitted nondominant carriers to provide common carrier services without filing tariffs. In  T-the Sixth Competitive Carrier Order, we adopted "mandatory detariffing," which required nondominant carriers to offer their services on an untariffed basis. In both cases, the Courts vacated our forbearance rules as inconsistent with Section 203 of the Communications Act, 47 U.S.C.  203.  T5-See MCI v. FCC, 765 F.2d 1186 (vacating mandatory detariffing); MCI v. AT&T, 114 S.Ct. 2223 (1994) (vacating permissive detariffing).  Although Courts later vacated our forbearance rules, they have not  d(#found our definition of dominance to be unreasonable. We have recently declined to revise the  Y - d(#definition of dominance.b   T-ԍ Specifically, when we adopted rules to govern tariff filings of nondominant carriers, we specifically declined to modify the dominant\nondominant regulatory dichotomy. Tariff Filing Requirements for Nondominant Common Carriers, CC Docket No. 9336, 8 FCC Rcd 6752, 6754  T -(para. 8) (1993), cited in First Report and Order, para. 346.  Accordingly, the standard for nondominance established in the  Y - d(#hCompetitive Carrier proceeding appears to be one reasonable standard for determining whether  d(#Ythe LECs have become nondominant. Parties supporting some other standard should explain in  d(#detail why the existing standard should not be used for this purpose and discuss why their  d(#proposal is preferable. If we adopt new criteria for determining whether LECs have become  Y-nondominant, should they apply to pending LEC petitions for nondominance?  T:%-ԍ See, e.g., Bell Atlantic Petition for Regulation as a Nondominant Provider of Interstate InterLATA Corridor Service, Public Notice, DA 951666 (rel. July 26, 1995). "lH0*((+"Ԍ Y- v z157. Third, we solicit comment on the procedures that a LEC should follow to obtain  d(#nondominant status for provision of one or more services. Petitioners should discuss whether  d(#;a LEC should file a petition for waiver, a petition for a declaratory ruling or some other filing and how the LEC should satisfy its burden of proof.  Y-  Y- v 158. Finally, we request comment on the tariff filing procedures that should apply to a  Yv-carrier that is determined to be nondominant. FJ:\PRICECAP\STREAM.SHD FJ:\PRICECAP\OTHER.SHD #&m PE37D&P#X01Í ÍX01Í Í#Xw PE37